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OUTLINE DETAILS:
School:
Harvard Law School
Course:
Contracts
Year:
Fall, 2005
Professor:
Elizabeth Warren
Text:
Cases and Materials on Contracts, 2nd Ed. (American Casebook Series) (2001)
Authors:
Robert W. Hamilton, Alan Scott Rau, Russell J. Weintraub
NOTICE:
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Page 1 of 43
I.
CONTRACT FORMATION
a. OFFER (11/8, 11/16, 11/21)
i. Objective theory of contract
1. An offer exists if a reasonable person would have believed that the party’s
objective manifestations of intent (words and actions) constituted an offer
2. Offer is the manifestation of willingness to enter into a bargain which creates a
power of acceptance (justifies the other party in understanding that his assent
can conclude the bargain)
a. e.g. Hawkins legitimately can interpret McGee’s words to constitute an
offer binding upon acceptance because a reasonable person would
have done the same based on the facts
i. (100% guarantee, McGee wanted to do the surgery and tried
to convince him several times, McGee solicited Hawkins’
father, etc)
b. This standard leads to court finding the terms of contract to be different
than the ones either side thought they agreed upon.
ii. Zero emphasis on subjective intent
1. A party’s subjective intent not to enter a contract is legally irrelevant; what
matters is objective manifestations: what a reasonable person would believe
the party’s intent to be based on facts and circumstances
a. e.g. McGee’s argument that he did not intend to contract with Hawkins
does not save him
i. Underlying reasons for not considering subjective intent
1. Impossible to ascertain what a part really meant
2. We would have little-to-no enforcement of contracts
because parties could get out of contracts whenever
the value changes by saying they didn’t mean it
a. Other party might rely on contract and pass up
other opportunities regardless of whether party
in question really “meant” it
iii. No inquiry into the “reasonableness” of valuing the exchange
1. Courts will not determine contract formation based on whether the alleged offer
was fair or reasonable (only whether other party reasonably could have found
an offer to exist)
a. Underlying reasons for not inquiring into reasonableness of valuation
i. Too subjective to do otherwise
1. Different judges have different interpretations of
reasonableness; dependent on circumstances
ii. Personal autonomy
1. Presumption underlying contract law is that individuals
decide what is good for themselves and can make their
own decisions about how much something is worth
a. e.g. Valco-Warren watch
2. Wealth enhancement- if a transaction is wealthenhancing for both individuals, then enforcement of the
contract makes everyone richer in theory even if down
the line one party would rather not have entered
contract
iv. Types of offers which are invalid
1. Offer made in jest
a. Not valid offer if offeree knows it is in jest
2. Solicitation of bids
a. Not an offer and cannot be accepted; is basis for preliminary
negotiations
3. Advertisements are generally not valid offers but rather invitations to deal
(11/21 notes- good policy arguments)
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a. Nebraska Seed- indefinite quantity; Lefkowitz coat ad is also too
indefinite (but other parts are definite enough)
b. EXCEPTION:
i. Ads with specific terms (promise to sell particular number of
units- 26 jackets to be sold at $26 apiece to first 26 people)
ii. Ads with words of commitment (send in 3 box tops and $1.99
to get X)
1. Lefkowitz- clear, definite and explicit advertisement
constituted an offer (11/21)
2. Steinberg v. Chicago Med School- med school’s
application brochure consisted of an invitation to deal,
which the applicant then made an offer to by sending
his application. Med school accepted offer by taking his
fee; therefore it is bound to apply admissions criteria
specified in brochure
c. Balance between protecting against deceptive ads (Izodi case- you
cant add terms using small print) and making sure people can still
advertise
4. Auctions are not valid offers but rather solicitation of bids, unless they are
“without reserve” UCC 2-328(3)
5. Offer in which the offeree knows that the offeror has acted in a manner
inconsistent with the offer being left open (e.g. Dickinson v. Dodds- open offer
to sell house closes when offeree learns that offeror has made deal to sell
house to someone else)
b. ACCEPTANCE (11/8, 11/16, 11/21)
i. A manifestation of assent to the terms made by the offeree in the manner invited or
required by the offer
ii. Subjective intent is irrelevant in determining whether acceptance is binding (Embryas long as objective manifestations of acceptance are there, does not matter whether
offeree subjectively intended to accept)
iii. Only person who offeror intended to create power of acceptance in can accept
1. Offers to the public at large can be binding (Newman)
iv. Offeree must be aware of offer to accept
1. Rewards: offer for reward for a particular act cannot be claimed by person who
does act without knowing of reward
v. Offeror is “master of his offer” and can thus prescribe method of acceptance
1. Must be given within time limit specified by offeror (Newman- TV show case)
2. If no specified method, acceptance can be given in any reasonable manner
a. UCC 2-206: offeror must be clear and unambiguous as to what
constitutes acceptance, otherwise we presume acceptance if it is done
in reasonable manner
vi. Acceptance of unilateral contract is done by full performance of the requested act
1. Great Northern Railway- unilateral contract whereby buyer can accept by
placing the order (performance).
a. Contract had no valid consideration because unlike requirements
contract under UCC 2-306, buyer didn’t give up right to buy from
someone else- requirements contracts are in fact bilateral
2. Most courts not require offeree to give notice after performing act within a
reasonable time
vii. If offer is unclear about whether acceptance is to occur through promise or
performance, offeree can accept by either promise or performance
1. Shipment of goods- you can accept by either promising to ship the goods or
actually shipping them. UCC 2-206(1)(b)
2. Accommodation shipment of non-conforming goods by selleris not
acceptance but rather a counter-offer, which the buyer can either accept by
keeping the goods or reject and send back the goods. Seller not guilty of
breach in either case UCC 2-206(1)(b)
viii. Acceptance by silence- generally not valid but there are a few exceptions:
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1. Offeror has given offeree reason to understand that silence will be
acceptance and offeree intends to be bound
2. Offeree who silently receives benefit of services will be said to accept if 1) he
had a reasonable opportunity to reject them and 2) he knew or should have
known offeror expected compensation
3. Prior course of dealing may make it reasonable for silence to be consent
4. Acceptance by dominion- if offeree receives and keeps goods, this is
acceptance
a. Hobbs- if goods are delivered to you and you use them, you can accept
by silence- esp continuing . Note: does not apply to unsolicited goods
sent from strangers
5. Mailbox rule- acceptance is effective upon proper dispatch unless the offer
provides otherwise
a. Acceptance lost in transmission is effective if it was properly addressed
even if never received but not effective if it was nnot properly
addressed
b. Offeree sends both a rejection and an acceptance
i. Rejection sent first: Acceptance will be effective only if it
reaches offeror before rejection
ii. Acceptance sent first: Rejection does not undo the acceptance
regardless of which is received first
ix. Bilateral contract
1. Both sides make promises= an exchange of promises
2. Making of preparations to perform is enough to cause an offer to be temporarily
revocable if justice requires
x. Unilateral contract
1. An exchange of the offeror’s promise for the offeree’s act/performance
2. Remains an offer until it is revoked by offeror or accepted by performance
3. Under classical contract law, only full performance results in acceptance
(Wormser, Patterson) and seller can revoke anytime up to them we move
away from this in Brackenbury v. Hodgkin
a. Offeror cannot revoke after offeree has partially performed a unilateral
contract
b. Effectively creates a new form of option and alternative to promissory
estoppel (Restatement Second 45)
c. Key because you don’t have to prove reasonable reliance like you
would for promissory estoppel and you always get expectancy if you
win
d. Actual beginning of performance, not merely preparations to perform
makes offer irrevocable (p. 503xi. UCC as liberal on contract formation (11/28)
1. 2-204: even if we don’t know exact instance of formation and terms are
indefinite, we can still have contract
2. 2-206: unless clearly specified by offeror, acceptance can be in any reasonable
manner
3. Allows court to fill in the blanks and gets away from the strict formalities (e.g.
mirror image rule)
4. Rationale:
a. Conform law to reality of business world (recurring theme with UCCsee firm offer, commercial reasonableness in damages, course of
dealing, trade usage)
i. Protects against opportunistic breachers who get out by virtue
of minor technicality or ambiguity
ii. Lowers cost of entering contracts because business practice
rather than legal technicalities govern transactions- so lawyers
are reuquired for every little thing
b. Protecting manifestation of will is the best way to protect will because
we bind people to actions rather than words
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c. ACCEPTANCE VARYING FROM OFFER/BATTLE OF THE FORMS
i. Mirror image rule- under common law, offeree’s response is an acceptance only if it is
the precise mirror image of the offer. Otherwise, it is a counter-offer.
1. Gives rise to the last-shot rule where parties trade offers and counter-offers
and the person who delivers the last form before the performance gets his way
ii. UCC rejects mirror image rule in 2-207
1. UCC 2-207
a. 2-207(1): any expression of acceptance or written confirmation will be
an acceptance even if it states terms that are additional to or different
from offer
i. Generally: we have an offer-acceptance even if terms are
different.
1. Response is not an acceptance if it is expressly
conditioned on the additional terms. Courts
generally don’t apply this unless it is clear that the
party is unwilling to proceed with the transaction
without the additional terms
ii. Dealing with additional terms
1. If at least one-party is not a merchant, offeree’s
response is still a contract but the offeror must
explicitly assent to any additional terms for them to
become part of the contract
2. 2-207(2)- If both parties are merchants, additional
terms automatically become part of the contract
UNLESS they
a. Offer explicitly limits acceptance to its
specific terms
b. Materially alter the contract (e.g. warranty
disclaimer)
c. Explicitly objected to by the offeror within a
reasonable time after notification
iii. Dealing with silent acceptance
1. If acceptance form is silent on one of the terms
contained in the offer, it will be treated as including
that term
iv. Dealing with conflicting terms
1. Knock-out rule- we knock-out terms where the forms
directly conflict and apply UCC gap-fillers
a. 2-308- place of delivery
b. 2-309- deliver within reasonable time
c. 2-310- when you have to make
payment/whether you can presume credit
d. 2-311- when terms of performance are not
definite/there are options
e. 2-312- warranty of title (discourages seller
from selling things he doesn’t have right to sell)
f. 2-307- delivery terms
g. 2-319 to 323- shipping terms (protects against
regional variations in trade usage)
v. Where response diverges too greatly to be acceptance, there
will be no contract
b. 2-207(3)- Conduct by both parties which recognizes the existence of a
contract is sufficient to establish one even if writings don’t create one.
c. UCC effectively kills last-shot rule and replaces it with the following:
i. Terms the parties agree on + UCC gap-fillers where they
conflict
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d. Under current UCC 2-207, there is a first mover advantage because
you will either get UCC terms or the first mover’s terms if the second
mover does not use “expressly conditional” language in his acceptance
i. Proposed 2-207 replacement eliminates first mover
advantage. We no longer will look at expressly conditional
language- just take the terms that the forms agree upon and
then add in the UCC gap fillers
e. Rationale for 2-207:
i. Protect unsophisticated users who don’t know language
ii. Move away from considering what parties meant to do to what
they actually did
iii. If you act like you’re in a contract, we’re going to put you in one
iv. UCC terms are predictable and are fair to both buyers and
sellers
v. Reflect business realities and efficient because it reflects
market principles
vi. Lowers cost of transaction
d. CONSIDERATION (10/26, 10/31)
i. A promise is supported by consideration (and therefore can be enforceable) if:
1. It contains the following elements
a. Detriment- promisee gives up something in value or circumscribes
his liberty in some way AND
b. Exchange- promise is given in exchange for the other party given up
value or circumscribing his liberty (forbear a legal right)- part of a
bargain
2. Implications of consideration requirement
a. Promises to make gifts are unenforceable
b. Business situations in which one party has not really promised to do
anything or given anything up (even if he appears to have done so)
are not enforceable
ii. BARGAIN ELEMENT
1. Gratuitous promises are generally unenforceable because they lack a
bargain element
a. Mere existence of condition itself not a bargain
i. Requiring promise to meet condition(s) is not sufficient to form
consideration if the meeting of these conditions is not
bargained for by the promisor (Kirksey)
1. Two approaches to deciding between gift and contract
a. 1) Holmes: reciprocal conventional inducement
is all that matters and underlying intent is
irrelevant
i. If it looks like a contract, it was a
contract
ii. e.g. Hamer- didn’t matter whether
uncle’s intent was to give a gift- the
forbearance of legal right (giving up
drinking and smoking), is adequate
consideration to sustain a legal
contract when no direct benefit is
conferred because the condition was
BARGAINED FOR (uncle gave offer,
nephew performed)
iii. Note: no benefit needed to be
conferred and neither the negotiation
nor the actual giving of the good
mattered it was the “if, then”
construction that put them into contract
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iv. White v. Bluett- limits what will be
considered a legitimate legal right
sufficient enough to create a
consideration if waived (son’s right to
complain not sufficient)
v.
b. 2) Kirksey: inquire into motive
i. Kirksey- even though Kirksey suffered
a detriment by meeting uncle’s
condition, the bargain element is
lacking. Because uncle’s motive was
gratuitous, it didn’t originate in contract
and could not be basis of bargain even
though formal if-then language was
there
ii. Rationale: these are really status
transactions and we don’t want to
extend contract boundary to deal with
all these gifts
iii. Gifts are usually between friends and
family so we want them government
by status not contract
iv. We dont know if gifts are wealthenhancing.
v. Concern about giving contracts with no
supporting consideration
vi. Duress/fraud issues
vii. Would be too easy to enter lawsuits
2. Unlike French system, American market model does
not inquire into the substance or adequacy of the
contract (see 11/1 notes for advantages and
disadvantages)
a. Atiyah: American court’s role is to ensure
preocedural fairplay in not just the form but to
ensure that the following were not factors in
the course of formation
i. Inequality of bargaining power
ii. Duress/fraud/misrepresentation
iii. Extraordinary circumstances (e.g.
Baby M)
b. Condition whose occurrence is of benefit to promisor
i. If promisor imposes a condition and the occurrence of this
condition benefits him, it will constitute a valid bargain
1. Altruistic pleasure of giving gift not sufficient benefit to
create bargain
c. Gifts which have already been given (executed gifts) cannot be
rescinded
i. Rationale: Other party relied, cautionary function (makes you
think before giving up)
2. Nominal consideration is not sufficient even though it may appear to be
consideration on its face
a. If consideration paid is so small as to be nominal, court will conclude
that there was no bargain
i. Schnell v. Nell- purely nominal bargain is not good enough
because it has no value other than a mere formality- fact that
contract is written and under seal does not matter because
consideration must go pass formality
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1. Replace formality requirement with exchange
requirement- an exchange is what makes a contract
enforceable, and once we see a bargain we will
enforce it vigorously
b. Even if non-trivial payment is recited, if it is not paid, courts take this as
evidence that no bargain was present
3. Adequancy of consideration is irrelevant as long as it is not nominal
a. Batsakis v. Demotsis- Once you have more than a nominal bargain,
we don’t inquire into adequacy- it can be a generally unfair bargain as
long as its not nominal
i. A court sees a promise and a consideration received, it is
enforceable even if contract is based on false recitation and
consideration is grossly inadequate
ii. Court rules that this is not a case government by a special
status allowing us to take it out of contract
1. See Baby M and Balfour
2. Post v. Jones- despite fact that auction of goods from
sinking ship had all the forms of contract, it was not a
contract due to the special circumstances- admiralty
law/salvage
b. Bennet v. Bennet- even if a person enters a contract with absurd
interest rate, it is enforceable unless you can prove insanity or fraud
4. Promisee must be aware of promise for his performance to be consideration
5. Past consideration is no good (11/15)
a. Promise made in return for detriment previously suffered by promisee is
not a bargain and therefore is not sufficient consideration
i. Mills v. Wyman: Past consideration not sufficient to support a
promise. Very formalistic decision where father doesn’t have to
pay for care for adult son if he makes promise after care given.
1. EXCEPTIONS: past consideration will be sufficient in 3
types of cases that started with a real exchange
a. Debtor discharged by bankruptcy promises to
pay debt
b. Debtor discharged by statute of fraud promises
to pay debt
c. Minor contracts with a suppier and hten makes
promise to pay after becoming an adult
ii. Webb v. McGowin- seems to go against rule and in the face of
bargain theory- holding that a promise to pay combined with a
benefit already conferred creates an enforceable contract.
Court finds away around the formal structure due to the unjust
enrichment (promisee cared for and improved property of
promisor)
1. See Restatement 86- promise for benefit previously
received (past consideration) binding if necessary to
prevent injustice
6. Moral obligation is not sufficient consideration (Mills v. Wyman)- your
conscience and not the court will deal with this
iii. DETRIMENT ELEMENT (10/26, 10/31, 11/1, 11/9, 11/14)
1. Consideration requires that the promisee suffer a detriment by doing
something she does not have to do or refraining from doing something that she
has a right to do
a. Detriment can be non-economic (e.g. Hamer)
i. Lindner- Subjecting yourself to an escape clause restriction
(lessor can walk out if he gives 30 days notice) is sufficient
detriment as long as its not nominal (10 minutes notice)
b. Adequacy of detriment is irrelevant
i. But extreme inadequacy may signal lack of bargain
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iv. PREEXISTING LEGAL DUTIES will not constitute a detriment for purposes of
consideration. So you cant promise to do what you are already legally bound to do or
forbear something you have no legal right to do to provide consideration.
1. So agreement for modification of existing contract for sole benefit of one party
is not generally enforceable
a. Exception: Restatement Second and most modern courts allow this
when modification is “fair and equitable in view of circumstance not
anticipated by parties” at contract formation
2. But if party takes on additional or extra duties on top of existing contract, this
does constitute the required detriment
3. Examples of contracts void of consideration due to pre-existing legal duty
a. Lesser sum in satisfaction of greater-Agreement by creditor to
accept less than full payment in satisfaction of a debt or allow extra
time to pay violates preexisting duty rule and is unenforceable (Foakes
v. Beer)
i. Employment cases- one more arrow in employer’s quicvery
because they can agree to pay a higher price and get
performance from employees and then back out later if the
employees were already under contract to provide the services
1. Stilk v. Myrick- Captain’s promise to pay more to
seaman on a undermanned ship is unenforceable due
to lack of consideration. Sailors had pre-existing legal
duty- they promised by contract to do all they could
under all the emergencies of the voyage to its end;
desertion of crew was an emergency.
a. Contrast with Harris v. Watson- in which
promise to increase wages of seamen made
under exigent circumstances at see is
unenforceable for public policy reasons as
opposed to consideration.
i. Restatement 178- when public policy
clearly outweighs interest in
enforcement, you can make contract
unenforceable
2. Alaska Packers v. Domenico- preexisting legal duty
cannot be consideration for subsequent agreement or
promise (sailors cant ask for more money for same
services). So what has formal trappings of real contract
is void for lack of consideration (in reality, use form to
get to substantive outcome- duress here)
3. Lingenfelder- brewery doesn’t have to fulfil promise to
an architect who quit in the middle of job to ask for
more demands.
4. UCC rejects the pre-existing duty rule, with some limitations
a. UCC 2-209- we make it easier to modify contracts; you can modify as
long as it is in good faith (no bad faith, extortion, fraud, etc).
i. 2-209(1)- agreement in UCC can be modified without
consideration
1. Rejects Foakes, Alaska Packers, Stilk and Harris
ii. 2-209(2)- clauses excluding oral modification are enforceable,
but in contracts between a merchant and a non-merchant, the
no oral modification clause must be signed separately
iii. 2-209(3)- modified contracts must satisfy statute of frauds
iv. 2-209(4)- modification attempts which fail under section 2 and
3 can be waiver (preventing other party from suing)
v. 2-209(5)- you can retract a waiver of executory portion of a
contract as long as other party has not relied
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5. Restatement takes the opposite tact, allowing modification of pre-existing
legal duty only when there are changes in circumstances which justify it
a. Compare with Restatement on duress- here there is a lower level of
proof (just show match between contract 1 and contract 2)
b. Posner would abolish preexisting legal duty and just do more on fraud
6. DeCicco v. Schweizer- Cardozo stretches the formal structure and “rewrites
the facts” of something structurally set up as a promise from father to daughter
for not breaking engagement by saying that although the daughter has
preexisting legal duty not to break, the couple could mutually rescind and their
giving up of this right provides valid consideration.
7. Settlements- forbearing right to sue by settlement is valid consideration
provided that the plaintiff surrenders a claim that is in at least some way
doubtful and he has a good faith belief that the claim may be valid (conflicts
with Duncan v. Black, 10/31)
a. Restatement Second 74- claim must be in good faith and at least in
some way doubtful
b. Conflict: Duncan v. Black- court finds that suing on a right they don’t
have (cotton allotment) was not valid consideration even though it was
in good faith
II. GETTING INTO CONTRACT WITHOUT STRICT FORMATION
a. PROMISES BINDING WITHOUT CONSIDERATION
i. Promises to pay past debts are usually enforced without consideration, although most
states required signed writing
ii. Promise to pay for benefits or services previously received (esp requested services or
emergency)
iii. Modification of sales contracts under UCC
iv. Option contracts under UCC
b. PROMISSORY ESTOPPEL
i. Restatement Second §90- promises which forseeably induce reliance will be enforceable
without consideration under promissory estoppel doctrine if injustice can only be voiding by
doing so
1. Requires actual reliance which is reasonably foreseeable
ii. Applications
1. Gratuitous promises (Feinberg)
2. Charitable contributions
3. Gratuitous bailments and agencies
4. Offers by sub-contractors
5. Promise of a job
6. Negotiations in good faith
7. Promises of franchise
iii. Remedy is usually reliance- put the plaintiff in position he would have been in if promise
hadn’t been made
iv. Case examples
1. Devecmon v. Shaw- Uncle insists plaintiff take trip to Europe and promises to pay
for it; plaintiff takes trip to Europe; uncle dies. Plaintiff can recover for cost of trip
even though he benefited from it because he was induced to spend his money in
this way due to reliance on uncle’s promise (note reliance and expectancy are
same here)
2. Ricketts v. Scothorn- Grandfather promises $2000 note to plaintiff so she doesn’t
have to work again; plaintiff quits her job. Grandfather dies. Plaintiff can recover
based on reliance on promise which put her in worse position (she quit her job)
3. Feinberg v. Phiffer- Promisee’s action of giving up her lucrative job in reliance on
the promise that she would be paid an annuity for the rest of her life constitutes a
sufficient consideration to make the promise binding.
4. Wheeler v. White-. Promissory estoppel theory allows for a remedy which enables
the injured party to be compensated for his forseeable, definite and substantial
reliance on a promise too unclear to be a contract. Reliance damages are sufficient
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because promise is partially responsible for reliance on lousy promise and should
thus be only put in the position he was in had he not acted in reliance
5. Hoffman v. Red Owl- We allow plaintiff to collect reliance damages when there
was no contract but he was induced to spend money during negotiations.
a. Argument that Red Owl kept “moving the finish line” and adding hurdles
for Hoffman which was unfair vs. idea that buyer should beware and
Hoffman shouldn’t’ have relied without a contract. Warren wonders why
the court didn’t just imply a contract here like in Wood.
c. CONTRACT IMPLIED IN LAW
i. Courts can find that a contract exists even when it is not based on actual fact, mutual
understanding or promise by creating a fiction “contract implied in law” in which it
infers the contract terms and awards reasonable compensation
1. Contam v. Wisdom- a contract implied by law exists when one party was
unconscious and unable to show intent/consent to enter into a contract to allow the
other party to render medical services. Court infers an exchange and awards only
reasonable compensation; given that there is no actual contract, court sets all
the terms.
a. DETERMINATIVE FACT: need to have NO prior opportunity to enter
into the contract
b. Key facts
i. Help was needed in an emergency situation
ii. Other party could not have entered into contract himself
iii. Surgeon expected compensation for his services
1. This is key because court needs proof to distinguish
between a gift and a contract for mutual benefit
c. Reasoning for finding implied contract
i. Social utility- we want surgeons to help unconscious people and
so courts say they will step in to allow completion of this wealthenhancing transaction
ii. For similar reason, we don’t require that defendant had to
benefit from services, because this would make doctors less
likely to perform such an act
iii. Note: Doctor does not get “expectancy” per se because although
he collects reasonable price for the operation, he thinks he would
have received more because this guy is rich. Court says it doesn’t
care- only gives reasonable compensation because they don’t want
to incentivize doctors only to help rich people in this situation.
iv. So remedy is actually a mix of expectancy and restitution (benefit
conferred to patient) or reliance (value of doctor’s time)
2. Michigan Central Railroad v. State- court implies a contract where no actual
contract exists after coal is conveyed by mutual mistake but the party who receives
it has an alternative way to get the coal at a cheaper price. Court allows delivering
party to collect not at market price but at the cheaper contract price of the accepting
party.
a. Similar to Contam in that court implies a contract, but different because
court takes into account the idiosyncratic circumstances by which state has
cheaper contract price but did not take into account fact that doctor charges
rich people more in Contam
b. Like Peavyhouse and Interior Elevator in that court chooses the lower
value remedy- this allows parties to get some compensation even though it
is not sufficient to make them whole- in effect, parties split the cost of the
mistake.
d. CONTRACT IMPLIED IN FACT
i. Wood v. Lucy Lady Duff- Cardozo actually implies a promise on behalf Wood- he is
inferring mutuality as a matte of fact- he comes up with the terms of the contract by saying
that Wood implied a promise to use reasonable best efforts to promote designs and this is
what creates mutuality.
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1. Unlike Contam where you have a public policy justification which court relies upon
in creating the fiction of contract implied by law. Here Cardozo takes the facts and
infers mutuality- a promise can be implicit as opposed to explicit and still put you
into contract
2. Very different than Kirksey where court finds any way possible to take you out of
contract, here Cardozo wants to put you into contract.
3. Rationale
a. UCC perspective- we want contracts because they are wealth-enhancing,
so if we see logical signs pointing to a contract, we should infer one exists
i. Kirksey different because it was a family and not commercial
relationship
b. Move away from formality to substance
c. Implications
d. Much easier to get into contract
e. We will infer a promise even though its not explicitly made
f. Limited nature of damages makes it easier to apply contract (monetary and
capped as opposed to in Kirskey forcing defendant to live on same land as
plaintiff)
ii.
Mabley- we put you into contract even though you explicitly say that your promise is
gratuitous because you receive a benefit. Employer’s promise of a year’s wages at death
induced Anna Work to continue working at the company; in doing so she furnished a
consideration. Company benefits from such a consideration by not having to rehire and
retrain and increased efficiency
iii.
Kearns v. Andree- We will imply a contract when you spent money to adapt land in
good faith reliance on an promise to buy the land. Even though the promise was too
indefinite to form a contract and you didn’t confer any benefit, we will grant you a remedy
(trimmed down version of reliance). Court polices market- we don’t want to allow conduct
which looks like contract to injure parties; however we are going to give you a trimmed
down remedy (trimmed down reliance)
III. GETTING OUT OF CONTRACT
a. Mistake
i. Mutual mistake- when both parties have the same mistaken belief (a belief that is not
in accord with the facts)
1. Three requirements must be satisfied in order for a party to avoid the contract
due to a mutual mistake
a. Mistake must concern a basic assumption on which contract was
made
i. Included as basic assumptions
1. Existence of subject matter
a. e.g. contract for land both parties think
contains 10K ft of timber but fire caused it to
contain only 1K ft
2. Quality of subject matter
a. both parties think a violin is a Stradavarius but
it is actually fake
ii. Not generally included as basic assumption
1. Mistakes about market conditions
2. Must have material effect on the agreed exchange
3. Contract cannot have explicitly imposed the risk of mistake on you
a. Lewanee- in case of mutual mistake, if one party has contractually
assumed risk of mistake through “as is” clause we don’t allow
avoidance
b. Seller generally bears risk of minerals being found on land
c. Builder generally bears risk of mistakes about soil or unexpected
conditions
ii. Mutual mistake cases (11/30)
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1. Cases all seem to turn on what the contract actually was for (based on the
objective manifestation and all the facts)- was it for a specific object of unknown
value (the specific cow Rose, the specific cans sold that happened to have
engines, a hotel room for a night) or for our conception of what the object
represents (a barren cow, a unfilled can, a hotel room to watch the coronation)
a. Sherwood v. Walker- the barren cow- latent ambiguity where parties
were bargaining for the same thing (unlike Raffles) but were both
mistaken as to what that was—so no contract. (Dissent: buyer was
buying a cow he thought to be fertile even though seller said it was
barren)
i. Sidenote: Under UCC we don’t care about title (2-401) and so
we don’t have replevin actions- we have specific performance
instead.
b. Wood v. Boynton- here we actually find a contract when both sides
are mistaken as to the value of the rock- we take the buyer’s version
that he contracted for the specific rock (whatever it was) as opposed to
the seller’s version that contract was for a “worthless rock”
c. West Coast Airlines- contract was for cans, not for cans filled with an
aircraft engine- so there is no contract
iii. Unilateral mistake- when only one party has a mistaken belief, it is more difficult to
avoid the contract
1. Requirements to get avoidance
a. Basic assumption
b. Material effect
c. Not bearer of risk of mistake under contract AND EITHER
d. Unconscionability- enforcing contract would be unconscionable OR
e. Reason to know- other party had a reason to know or was at fault for
mistake
2. Typical cases
a. Construction bids
i. Unconscionability requirement met only if contractor shows he
will be severely harmed and other party has not relied
ii. Contractor can show that other party knew or had reason to
know (i.e. the bid was far lower than any other bid)
3. Other key points
a. Existing fact- doctrine of mistake only applies to existing facts not
future ones
b. Mistake of law- mistake about a legal principle can be a mistake
c. Negligence will not ordinarily prevent relief, but if you fail to read the
contract you generally cant get relief
4. Remedies
a. Avoidance of the contract- proceed as if there was no contract and
award restitution
b. Reliance- awarded when restitution/avoidance doesn’t work because
one party has relied to detriment but other party hasn’t benefited
b. Duress
i. Available as a defense if defendant can show he was unfairly coerced into entering or
modifying a contract due to a wrongful act or threat which overcomes the free will
of a party
1. Restatement 176- defines improper threat
2. Harder to prove than pre-existing legal duty (Glanmorgan)- need to show bad
fiath effort
3. Subjective standard will be used to determine whether free will has been
overcome (not the objective standard used in formation- reasonable person)
ii. Typical ways to commit duress
1. Violence or threats of it
2. Imprisonment or threats of it
3. Wrongful taking or keeping of a party’s property or threats to do so
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4. Threats to breach a contract or commit other wrongful acts
iii. Threats of abusive or oppressive acts can be duress even if the party had the legal
right to perform that act
1. Mitchell v. CC Sanitation- employer’s threat to fire employee can be duress
even though employer is legally entitled to fire
2. Restatement Second 175- Mitchell- contracts are voidable if induced by an
improper threat which leaves no reasonable alternative
3. Restatement Second 176- definition of improper threat
iv. Threats to breach a contract unless it is modified in your favor can constitute
duress if there is a violation of the good faith and fair dealing standard because you are
trying to extract an unfair advantage (Lingenfelder)
1. Exception is for unanticipated circumstances where duress is not caused by
any of the party- Posner argues we should enforce such modifications because
otherwise we people wouldn’t enter into those contracts (e.g. builder of
foundation faced with unforeseen circumstance in ground/soil)
2. Restatement Second 89- when you don’t cause the duress, modification can
be binding- we look to see whether renogiated contract is “fair and equitable”
v. Selmer- duress can only be found if it was caused by the other party (so a company in
economic trouble forced into a settlement agreement cant invalidate it because of
duress)
c. Unconscionability
i. UCC 2-302(1)- If court finds a contract or a clause is so unfair as to be unconscionable,
it can decline to enforce that contract or clause.
1. Williams v. Walker Thomas- unconscionability can be a defense to a contract
that is otherwise regularly written
2. Broad scope of remedies available to court
a. Strike the offending clause but enforce the rest of the contract
b. Rewrite the offending clause
c. Refuse to enforce the whole contract
3. We don’t give this power to the jury because we don’t want them to be able to
find for consumers even when the corporations are technically correct (like
Hadley and Batsakis limits on jury)
4. We focus on procedural violations as opposed to reallocating bargaining power
ii. Key factors in finding unconscionabillity
1. Subjective intent- other party must understand and assent (but still an objective
standard)
2. Mutual mistake
3. Fraud/misrepresentation/duress
4. Bargaining power
5. Commercial reasonability- is this an aberrational practice?
iii. Types of unconscionability
1. Procedural
a. Party is induced to enter contract without having any meaningful choice
i. Burdensome clauses in fine-print
ii. Misleading salespeople
iii. Adhesion contracts in industries with few players
2. Substantive
a. Contract itself is unduly unfair and one-sided
i. Excessive price (usually accompanied by procedural
unfairness)
ii. Remedy meddling
1. Disclaiming or limiting warranty (esp with respect to
damages for personal injury)
2. Limiting warranty to repair and replacement when this
would be useless
3. Unfairly broad repo rights
4. Waiver of defenses by buyer against seller’s assignee
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5. Cross-collateralization clause (secured seller who sells
multiple items to buyer on credit can repo all items until
last penny of total debt paid)
a. Williams v. Walker Thomas- crosscollateralization clauses are not per se
unconscionable but it is a question of fact
iv. Class notes
1. Question of what we do when we just don’t like the outcome of the contract- i.e.
enforcing a contract against the poor widow in Newman and Snell’s State
Bank v. Hunter
a. We can either say it is substantive in name and say that we make an
exception because it is a poor widow or use a procedure to accomplish
a substantive end
i. Posner: We can’t intervene substantively to help poor because
as soon as we do this we prevent future poor people from
being able to enter into wealth-enhancing contracts because
other party fears they wont be enforced
ii. So instead, we grasp at any procedural defect to accomplish
the end of helping the widow—LEGAL REALISM:
circumstances here are crucial
d. Statute of frauds (10/17, 10/18)
i. There are five categories of contracts which are unenforceable unless in writing
and thus fall within the “Statute of Frauds”
1. Suretyship- contract to answer for the debt or duty of another
a. Exception: main purpose rule- if promisor’s main purpose in promising
suretyship is to further his own interest, it does not fall within Statute of
Frauds
2. Consideration of marriage- contract made for which marriage or a promise to
marry is the consideration (e.g. if you marry me, I’ll buy you a car)
a. Exception: mutual promises to marry with no ancillary promises
regarding property transfers are enforceable without writing (e.g. an
oral engagement)
3. Land contract- contract for sale of interest in land
a. INCLUDED: Leases over a year and mortgages are within statute
b. EXCLUDED: Leases less than a year and contracts incidental to
land (e.g. build a building on the land) are not within statute
4. One year- contract which would be impossible to perform within one year of
making
a. Possibility of performance not discharge is what matters
i. INCLUDED: Personal services contract for multiple years
because even if employee dies within one year, contract has
been discharged but not performed
ii. EXCLUDED:
1. Lifetime employment or non-compete contracts
because death within one year renders performance
complete
2. Full performance by one side takes contract out of
one year provision even if performance took longer
than a year
iii. Applies to all contracts, including those failing other
categories (i.e. contract to sell goods for $300 18 months for
now included)
5. Sale of goods over $500
a. UCC 2-201(1)- contract for sale of goods for more than $500
unenforceable unless there is “some writing” sufficient to indicate
contract has been made
i. “Some writing” must indicate there is a contract, name of
parties, signed by party to be charged and state a quantity
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ii.
iii.
iv.
v.
vi.
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1. Signature can be any authentication- initials,
letterhead, etc
ii. Exceptions- writing not required in these situations
1. Specially manufactured goods which are made
specifically for buyer and not suitable for sale to others;
seller must have made substantial beginning of
manufacture or commitments for procurement UCC 2201(3)(a)
a. Rationale: lower risk of special manufacturer
fraudulently claiming contract because risk
factor is very high since they cant sell product
anywhere else
2. Estoppel- other party admits in court that contract for
sale was made- limited to quantity of goods admitted in
court- 2-201(3)(b)
3. Goods accepted or paid for- goods have been paid
for or received and accepted- 2-201(3)(c)
4. Administrator or executor paying damages out of
his own estate
Signed memorandums can satisfy the statute in absence of a signed contract if
they meet appropriate requirements
1. Memo must meet the following requirements to satisfy statute
a. Reasonably identify subject matter
b. Indicate a contract has been made
c. States essential terms with reasonable certainty
d. Major mistakes likely to invalidate memorandum
e. Signed by party to be charged
i. Signature requirement means that some contracts will be
enforceable against one party but not the other
Under UCC 2-201(2), writing satisfies the statute if it is sufficient to indicate a
contract has been made and is signed by party against who enforcement is
sought
1. Under UCC, omissions or mistakes are generally not fatal but may limit
recovery (e.g. mistake on quantity might limit recovery to quantity stated in
memo)
2. 2-201(2)- Unsigned memorandums can satisfy the statute under UCC in
situation where you have CONFIRMATION
a. Merchant who receives a signed confirmation from the other party will
be bound unless they object within 10 days of receiving confirmation
b. Applies only when deal is between merchants
i. Policy reasons for this include not allowing non-merchants to
push contracts on each other (unsolicited letters), and not
wanting to hinder trade between merchants by allowing them to
get by on technicalities
In non-UCC cases, oral recission does not have to satisfy the statute of frauds
even if the contract being rescinded fell within the statute.
1. True even if written agreement contains a “no oral modifications or recissions”
clause unless it is a contract for the sale of goods under 2-209(2) which says
such a contract must be rescinded in writing (BUT 2-209(2) might be waived for
parties who rely on an oral recission to their detriment)
For oral modifications, they are enforceable only if the contract as modified is
enforceable when treated as if it were an original contract under the Statute of
Frauds
1. Otherwise, original contract without modification is left standing.
Under the UCC, oral modifications are only okay if the contract as modified would
not fall under Statute of Frauds
1. Minor terms might be modified orally as long as major terms (description, price
and quantity) remain unchanged—e.g. change in delivery date
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2. A “no oral modifications clause” is effective under UCC
vii. Partial performance or reliance on an oral agreement which falls within the
Statute of Frauds may give rise to various remedies for plaintiff
1. Quasi-contractual recovery
a. Partial performance of an oral agreement under Statute gives may
allow plaintiff to recover in quasi-contract for the value of benefits
conferred upon defendant
i. Quasi-contract recoveries not limited to contract price (e.g. if
market value is greater than contract price, he can recover
FMV)
b. Promissory estoppel
i. Plaintiff who has relied on an unenforceable oral contract may
also use promissory estoppel- if he forseeably and
reasonably relies to his detriment, court may enforce the
contract if it is the only way to prevent injustice
1. Particularly likely in cases where on party
misrepresents whether contract falls under Statute
2. UCC context- courts split on whether PE can be used
3. Greater the injury and unjust enrichment, the more
likely PE is to be applied
viii. Cases
1. Boone v. Coe- plaintiff cannot get expenses incurred and time lost in reliance
on oral agreement for sale of land which is not enforceable under statute of
frauds
a. Court says it cant give reliance because this would effectively be
enforcing a contract and thus destroying statute of frauds
b. WARREN: Boone v. Coe stands as pretty stark evidence that the court
will not go out of its way through promissory estoppel to enforce a
contract that the law has deemed unenforceable (in that case, by the
Statute of Frauds). The argument here is that PE should remain
confined to helping out when consideration fails, not when the law
provides alternative enforcement routes that the parties failed to take.
Exploring this question was worth bonus points.
i.
c. Restitution is granted- under Contam notion, benefit to defendant
means there is an implied obligation to pay to avoid unjust enrichment
i. Restitution gives a stronger basis for recovery because its most
offensive when you actually benefit the other party in addition
to inuring yourself- so you can always get restitution
ix. Key points in class
1. Functions of statute of frauds
a. Decrease fraud (both of saying there was a contract when there wasn’t
and vice versa)
b. Cautionary function
c. Forcing people to put it in writing assures more deliberation (particularly
in areas where people can get carried away like debt or marriage)
d. Evidentiary function
e. Provide hard, written evidence of contract
f. Channeling function
g. Makes it very clear to people the steps they have to take to bind other
parties into a transaction they want to complete
2. Minimal nature of requirements under UCC
a. Avoids letting people get out on minor technicalities and thereby doing
a lot of harm to people relying on oral contract
e. IMPOSSIBILITY (12/5)
i. Generally courts, will discharge parties if performance has been rendered impossible
by events occurring after the contract formed
1. Destruction of subject matter
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a. Discharge will be granted if we have discussion of property which is
essential to the performance of the contract and was specifically
referred to or understood by both parties to be used in performance
in contract
i. Taylor v. Caldwell- when music hall burns down before a
concert schedule to happen there occurs, contract between
owner and the concert promoters would not exist- promoters
could go find another music hall as if there was no contract
(not reasonably foreseeable)
ii. Construction contracts- no discharge if you are in the
process of constructing a new building and it burns down
halfway through; however there is discharge if you are
repairing an existing building which thenburns down
b. UCC/sale of goods
i. UCC 2-509- Unlike common law, where risk of loss goes with
the title, the UCC doesn’t care about title- it just says risk goes
to buyer when goods are delivered to carrier. Note: if
seller’s obligation is to deliver not just to carrier but to buyer’s
place of business, risk of loss does not pass to buyer until he
receives good.
ii. Offset by UCC 2-501, which allows buyer to insure goods as
soon as they are identified to the contract (before delivery)
iii. 2-613- casualty to identified goods (through no fault of either
party) before risk of loss passes to buyer means that he can
say no contract- essentially, some events are so bizarre that
we will say no contract
iv. 2-615- delay or non-delivery of goods due to an contingency
the non-occurrence of which was a basic assumption of the
contract is not breach on part of seller
2. Failure of agreed-upon means of performance
3. Death or incapacity of party
f.
Frustration of purpose
i. Griffith . Brymer- cancelled coronation case- we find no contract because renter
contracted for “a view for coronation” not just for a hotel room
1. Key factors
a. Foresseability- the less foreseeable, the more likely court will allow
defense
b. Totality- the more totally frustrated, the more likely we allow defense
IV. CONTRACT TERMS AND INTERPRETATION
a. Misunderstanding (11/21)
i. Generally, courts will find that there is no contract if
1. Parties have a different subjective belief about a term in the contract
2. Term is a material one
3. Neither party has reason to know of misunderstanding
ii. Patent ambiguity- you can tell that there would be no way to know what contract
meant by reading it
iii. Latent ambiguity is one which you would not be able to spot just by reading the
contract. Courts have moved from finding no contract in these cases to trying to
interpret the ambiguity using facts, trade usage, etc
1. Raffles v. Wichelhaus (“Peerless” case)
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a. Court finds that no contract exists due to latent ambiguity as to which
ship “Peerless” the parties meant- no clear or reasonable interpretation
here.
i. Existence of latent ambiguity vitiates the guarantee that the
contract would be wealth-enhancing
ii. Court tries to “do no harm” by finding no contract, but in reality
this causes harm to seller by making seller bear the risk of the
market dropping
b. Frigalament (Judge Friendly) court takes the opposite approach by
finding a contract in the case of a latent ambiguity by interpreting the
meaning of the ambiguous term chicken by using trade usage
(problem here was no trade usage for chicken)
iv. Indefiniteness
1. If the contract terms are too indefinite, court will not enforce the contract.
However, court will often “supply terms” where it is reasonable
a. UCC gap fillers
b. Non-UCC- “supply term on reasonable basis”
c. Implied obligation of good faith and fair dealing (UCC 1-304)
d. Party supposed to behave in manner consistent with other party’s
reasonable expectations
e. Court will supply missing term where parties leave to be “agreed upon
later” only to not reach agreement
b. Trade usage, course of performance and course of dealing
i. Tools used to resolve ambiguities in order of importance
1. Course of performance- prior dealing by same parties in the particular
contract at hand
2. Course of dealing- prior dealing by same parties in past contracts
3. Trade usage- practices used regularly in the trade (different parties with similar
contract details)
ii. Other tools
1. Assume general interpretation as opposed to specific
2. Construe ambiguities against the drafter
3. Appeal to outside authority (e.g. government standard)
4. Look to negotiations leading up to contract (problem is that parties will say they
didn’t mean what they said, it was just bluster)
5. Look at the economics or purpose of trade usage (fear that this will wipe out
good bargains and restrict people to middle of road deals)
6. Look at price (Friendly in Frigalament)
iii. UCC on trade usage
1. UCC 1-205(1)- prior dealing- if we have contracted repeatedly in the past,
previous dealings are fair game in interpreting the contract
2. UCC 1-205(2)- trade usage
3. UCC 2-208- past performances of same contract govern terms and if you want
to change them, you need to give notice
iv. Advantages of using trade usage, etc
1. Cheaper and easier to form contracts
2. Easy reference point/accessibility
3. Makes sense to use definition adopted by market
4. Reassures parties that if they fail to spell something out in a contract the worse
that will happen to them is they will go with the industry standard (limits
consequence like Hadley)
5. Cuts down on litigation
v. Disadvantages
1. Can create barriers to entry (makes it difficult for outiders to play)
c. Parol evidence rule (12/6, 12/7):
i. evidence of a prior agreement (oral or written) may never be admitted to contradict an
integrated writing, and may furthermore not even supplement an integration which is
intended to be complete (see Mitchell v. Lath- oral agreements preceding or
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contemporaneous with written contract (full integration) cannot be introduced as
evidence of additional terms)
1. When the writing is a partial integration, you cant admit parol evidence which
will contradict a term in the writing
2. When a document is a total integration, you cant admit parol evience that
would contradict or add to term in the writing.
3. Integration definitions
a. Integration = a final expression of the agreement between two parties
b. Partial integration = a document intended to be final but not intended
to include all the details of the agreement
c. Total integration = document that is a final expression and is intended
to include all details of the agreement
i. How do you decide if it is the total? (See 12/7 notes for policy
arguments)
1. Restatement 1st-Williston: you just look at the
writing
2. Restatement 2nd- Corbin: you look at all the
negotiations and oral agreements to determine
whether parties intended it to be the final
agreement
4. Does not bar consideration of agreements written contemporaneously or
subsequent oral agreements (modifications)
5. When the parol evidence rule DOES NOT APPLY
a. You can introduce parol evidence to show fraud, illegality, duress,
mistake or lack of consideration—any evidence showing no valid
contract exists or is void
i. Goode v. Riley- parol evidence of a mutual mistake is
admissable
ii. Also to show proof of a condition
6. So defenses against parol evidence rule
a. 1) Writing is not fully integrated
b. 2) Induced to sign contract by fraud/duress
i. Question of reasonable reliance arises
c. 3) Need parol evidence because there was a mutual mistake
7. UCC 2-202- essentially follows same parol evidence rule with a few exceptions
a. Parol evidence is excluded except: 1) course of
dealing/performance/trade usage evidence can be admitted 2) the
writing is not a fully integrated agreement
i. See Jordan v. Doonan Truck, which rules that in conflict
between 2-202 parol evidence rule and 2-316(1) stipulation that
oral express warranties from seller cant be excluded by writing,
the parol evidence rule wins
V. KEY CONTRACT TYPES AND TERMS
a. Options contract (11/2, 11/7, 11/22)
i. Traditional common law approach requires consideration to form option but
Restatement (modern) approach is that signed options contract reciting the
payment will be irrevocable even if consideration never paid (See 11/7 notes for
reasons we treat options differently)
1. Seyferth v. Groves and Sand Ridge- recitation of nominal payment enough to
make options contract enforceable even though payment is not accepted
ii. UCC “firm offer” is even more liberal.
1. 2-205: firm offer is irrevocable without any payment of consideration. All you
need is
a. Offer from a merchant
b. In signed writing
c. Explicit assurance that offer will be left open
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2. Options contracts for longer than 90 days require consideration
3. In forms drafted by offeree, offeror must separately sign “firm offer clause”
iii. Restatement Second 45- alternative to promissory estoppel in options contract for the
offeree when the offeror revokes after partial performance. We don’t require you to
prove injurious reliance or benefit conferred. You can get expectancy instead of
reliance.
1. Key point: you must have actually begun performance, not just preparations
to perform. (White v. Corlies).
a. Once you begin performance, this is like a promise to complete
performance (see Restatement 62)
2. Line is where your preparations to perform become specific enough that
they couldn’t be used for something else (See Restatement 87(2) which
says preparations to perform can create contract to extent necessary to avoid
injustice- e.g. lime green dresses and Comment f to Restatement 45- factors
on which distinction between preparations to perform and beginning
performance).
iv. Class notes
1. Why we need consideration to make an offer turn into an option- why don’t we
just require offers to be held open (bind them as soon as they make a promiseFried)
a. Channeling- allow buyer and seller to know how to make something
enforceable
b. People would lose their freedom too easily
c. People would not make offers anymore- why bind yourself when your
promise doesn’t by anyone else- without the mutuality, its not wealthenhancing
v. WARREN ON OPTIONS
1. As a matter of policy, modern courts should understand that a seller has
something to gain if the buyer will expend time and money in considering
whether to buy the seller’s goods – something a buyer may not do unless she
knows she will have an enforceable option to buy. This makes courts more
tempted to enforce option contracts, notwithstanding the niceties of classical
consideration doctrine. Student discussions on this option issue went the full
range (and racking up lots of points). People talked about how the cautionary
functions of contracts had been met when Famous signed the recitation, how
his intent to hold the contract open had been expressed, and how courts were
loathe to inquire into the adequacy of consideration. Some people also
discussed how difficult it would be for Famous to deny receiving the $10 when
he had already put in writing that he had. (Note, however, this is not a parol
evidence rule problem. No one claims the option somehow is an integrated
document and no one wants to add other terms to the option not found in the
writing. This is a straightforward contradiction on the evidence, which he will
have trouble getting around as a matter of credibility.) Some people went the
other way, noting that the writing isn’t controlling, that the courts can always
inquire about what actually happened, and pushing on the sham nature of a
contract for nominal consideration.
b. Requirements contract (11/9)
i. Buyer’s promise of exclusivity for seller’s return promise to supply buyer
1. Good faith quantity- need to have good faith quantity; but canot be
unreasonably disproportionate to any state estimate or in absence of estimate,
normal/comparable prior quantity
a. ex. Empire Gas- Jobber (someone who buys to sell as opposed to
buying for own consumption) vs. regular consumer
i. Jobbers have no commitment/need to buy and are not
assuming any risk of market but get benefit of market if it goes
up. So if you’re a jobber, get an OPTIONS CONTRACT (you
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can then buy if market goes up, but go elsewhere if it goes
down).
c. Condition (11/8)- event which must occur before a particular performance
i. Scott v. Moragues Lumber- a contract subject to a condition precedent that is solely
within the control of one party is not void for want of mutuality unless choice is
completely unfettered (e.g. If I feel like it, I will…)
1. Key test is whether there is something you can be sued upon- condition must
be real not nominal.
2. Sorenson- you have to make a good faith effort to fulfill condition. This is not a
matter of law rule but it can be read into the facts.
ii. Express condition- explicitly agreed to by parties
1. Requires strict compliance
a. Courts avoid applying strict compliance if it would result in a forfeiture
(one party relies on bargain but insisting on strict compliance would
prevent him from getting expected benefit)
b. Condition can be excused if it would result in extreme forfeiture and
the damage to the other party’s expectation would be relatively minor
c. Satisfaction- if condition requires other party to be satisfied, courts
presume an objective standard of reasonable satisfaction unless
parties intended it to be subjective satisfaction (e.g. taste in color of
house).
i. If it’s a third party that needs to be satisfied, use a subjective
judgement which must be made in good faith
iii. Constructive condition- condition implied by court but not explicitly in contract
1. Requires substantial compliance
a. Bilateral contract- substantial performance by each party of his
promise is generally constructive condition to performance of any
subsequent duties (e.g. contract to build house for $100K, with owner
to pay $10K after foundation laid- if foundation is laid and he doesn’t
pay, builder doesn’t have to finish building house)
d. Oral agreements subject to writing (11/21)
i. As a matter of law, agreements “subject to” writing do not always require writing to have
a contract (Empro)
1. Texaco- we look into the totality of circumstances; here there was adequate
evidence of intent to be bound
e. Express warranties (11/30, 12/5)
i. UCC 2-313- explicit promise or guarantee that the goods will have certain qualities
which becomes part of the basis of the bargain
1. Description of goods can be express warranty
2. Sample or model- is an express warranty that rest of goods will conform to
sample
a. 2-313(2) Puffing will NOT become express warranty—so seller’s
opinion/recommendation or affirmation of value of goods (“this is a topnotch car”) does not create warranty
i. Question arise of when ads go too far- when its puffing vs.
specific enough to create express warranty (Carbolic
Smokeball Case where ad was specific enough to create
warranty)
ii. Remedy is expectancy, which can make it more attractive than mistake (which gives
you recision)
iii. Note: parties in contracts for the sale of goods ARE NOT required by law to disclose
information about extrinsic circumstances affecting the value of the good as long as
means of intelligence are equally accessible to both parties (Laidlaw v. Oregon)
question of fact which depends on circumstances (see 12/5 notes for list of facts
that matter)
f. Implied warranty of merchantability (11/30, 12/5)
i. UCC 2-314- unless excluded or modified, warranty that goods will be merchantable is
implied in a contract for their sale if the seller is a merchant 2-314(1).
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1. 2-314(2)(c)- goods must be fit for ordinary purpose for which such goods are
used
2. Always given unless disclaimed
3. Goods must conform to promises or affirmations of fact in the label- 2-314(2)(f)
g. Warranty of fitness for a particular purpose (11/30, 12/5)
i. UCC 2-315- If seller had reason to know of any particular purpose for which the
goods were required and the buyer relied on the seller’s judgment to furnish such
goods, implied warranty that the goods will be fit for such a purpose.
1. Elements
a. Seller had reason to know buyer’s purpose
b. Seller had reason to know buyer was relying on his judgment
c. Buyer actually did rely on seller’s judgment in selecting goods
i. Insisting on a particular brand is not reliance on sellers
judgment
h. Waiving warranties (11/30, 12/5)
i. When there is a conflict between an express warranty and a waiver disclaiming
warranty, it will be resolved such that the negation of the express warranty drops out
ii. UCC 2-316- allows explicit disclaimers waiving implied warranties
1. 2-316(2)- disclaimer of implied warranty of merchantability must mention the
word “merchantability” and if in writing it must be conspicuous (not in fine printbolded, caps, etc)
2. Disclaimer of warranty for fitness for particular purpose must be in writing and
must be conspicuous
3. Implicit waivers
a. Langauge of sale- “as is” will implicitly exclude implied warranties
b. 2-316(3)(b)- if buyer asked to examine sample, no warranty for defects
which examination should have revealed
c. Course of dealing/trade usage can exclude implied warranty
d. Magnusson-Moss- when written warranty is made to a consumer, no
disclaimer or modification of any implied warranty
i. Hahn v. Ford Motor- disclaimer in book came to late to be part
of contract even though plaintiff appeared to assent to it
i. Form/adhesion contracts (12/12)
i. You can avoid enforcement on an adhesion contract if you can show either that it
violated your reasonable expectations or was unconscionable
ii. Reasonable expectations
1. Question is whether a reasonable person in the party’s position would have
expected that the clause in question was in the contract
iii. Unconscionable
j. Deposits
i. Non-refundable deposits are related to liquidated damage clauses
1. UCC 2-718(2)
a. A breaching buyer is entitled to restitution by the amount which the
deposit exceeds:
i. The amount stipulated by the liquidated damage clause
ii. In the absence of a LD clause, 20% of the value of total
performance or $500 (whichever is smaller)
1. Encourages parties to specify LD damages question
arises of whether saying a deposit is “nonrefundable” is
enough to qualify as an LD clause under 2-718(2)
VI. QUESTIONS OF ENFORCEMENT
a. Third party beneficiaries (12/6, 12/7)
i. Generally, third parties who are intended beneficiaries CAN SUE. Third parties who
are just incidental beneficiaries cannot sue. Restatement Second. (See 12/7 notes
for policy arguments why this should be the case)
1. Intended beneficiaries
a. Payment of money
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i. Performance will satisfy obligation of promisee to pay money to
third party (creditor beneficiary)
1. e.g. Choate Hall- third party law firm can sue on a
promise not made to them which would result in their
getting legal fees
2. e.g. Purchaser “assumes” a mortgage
b. Intent to give benefit
i. Promisee intendes to give the beneficiary the benefit of the
performance (donee beneficiary)
1. e.g. Seaver v. Ransom- niece can sue on a contract
between husband and wife made for her benefit
2. Most courts promisee intent alone is enough; some
require intent of both promisee and promisor
2. Incidental beneficiaries
a. Member of public who is hurt by private contractor failure to perform
contract with government
i. Exception: private contractor explicitly promised liability to
public OR government has duty to provide service it contracted
for
b. Purchaser is “subject to” a mortgage
b. Assignment and delegation (12/7)
i. Assignment- transfer a right under the contract to a third party
1. General rule: all contract rights are assignable unless
a. Materially alter obligor’s duty (esp. personal services contracts
where there is a relationship of trust/confidence between parties)
b. Materially vary the risk (e.g. insurance contracts)
c. Impair obligor’s chance to obtain return performance
i. e.g. Contract with a famous fashion designer where I expect
benefit from being able to say I worked with famous designer; if
this is assigned to a low quality designer, hurts my ability to
obtain that return performance
d. CH Little- contracts which are not personal in nature can be assigned
2. UCC 2-210- you can assign or delegate unless otherwise agreed upon or if the
other party has a substantial interest in having the original promisor perform
a. Allow the change to make contracts assignable because business has
become less personal and the existence of warranties in place of
caveat emptor make it less important that you know precisely who you
are dealing with
3. Assignments supported by consideration are irrevocable whereas gratuitous
assignment can be revoked unless there is 1) a symbolic document (e.g.
handing over bankbook), 2) assignment is put in writing, 3) assignee forseeably
relies, or 4) obligor gives performance to assignee
ii. Delegation-appoint a third party to perform your duties under contract
1. General rule: all contracts can be delegated unless oblige has a substantial
interest in having the delegator perform
a. Particular skills- contracts calling for promisor’s use of his particular
skills (e.g. doctor, artist)
i. Personal services (e.g. employment, independent contractors
with special skills)
1. Construction contracts can be delegated usually
b. British Wagon (delegation)- obligor must accept performance of
obligee’s duties by delegate
2. Delegator is still liable for his obligations under the contract after delegation
a. Only way to get out of liability is novation- make a new contract
whereby obligor is relieved of all liability under first contract
c. Substantial performance
i. Without substantial performance, the other party’s remaining duties on the contract are
discharged. If failure to substantially perform is easily cured, then other party’s duties
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are just suspended until defaulter can cure. If not cured within a reasonable time, then
other party is discharged and can sue for a breach
ii. Factors which constitute a material breach
1. Deprivation of expected benefit
2. Extent of part performance
3. Likeliness of cure
4. Willfulness
5. Delay
iii. UCC 2-601- perfect tender rule
1. If goods fail to conform in any respect, buyer can reject the whole, accept the
whole, or accept the conforming ones and reject the rest.
a. But there are a lot of loopholes
i. Rejection must occur within reasonable time
ii. Rejection cannot be preceded by acceptance (e.g. buyer
inspected the goods and indicated that the were conforming or
he would keep them anyway; buyer inspected but failed to
make timely rejection; or buyer performs act inconsistent with
seller’s ownership like using the goods)
iii. Buyer can revoke acceptance only if he shows that the nonconformity substantially impairs the value of the goods
iv. Right of rejection and right of revocation are subject to seller’s
right to cure non-conformity (UCC 2-508(1))
1. Must cure seasonably within a reasonable time
(depends on product and how quickly the market
changes- if its stock need to cure immediately but if it
was a jumbo jet you have more time)
2. Need to notify the buyer of intention to cure
iv. Jacob and Youngs v. Kent- substantial performance which slightly deviates from the
terms of the contract is enough to get full payment (or to be liable only for diminution of
value as opposed to cost of completion).
1. Cardozo criteria for substantial performance as fulfilling contract
a. Deviation must be objectively trivial
i. Note- what Cardozo tries to distinguish as art v. utility is really a
cover in that the subjective valuation of owner seems to matter
b. Good faith = not willful, intentional, or fraudulent.
2. Goes against classical “perfect tender” rule
3. So Cardozo not only makes it easy to get into contract (Wood, DeCicco), he
also says that we will go easy on remedy (Jacob) different than Williston’s
hard to get in, but once you do there is absolute liability
4. WARREN ON JACOBS
a. Jacobs & Young is the easier case to distinguish from Willis v. Lisa.
Cardozo justified his decision on three facts that are not obviously
present in our problem: the innocent state of mind of the breaching
party, the absence of any discernible injury to the aggrieved party, and
the strong indication that the aggrieved party (not the innocent party)
was behaving strategically. Cardozo discussed all three facts in some
detail (although he never used language such as strategic behavior-remember how he began with a discussion of how these were rich
people who happily used their house while they tried to stiff the
contractor for the remainder of the price?). He suggested that without
these facts, he would have gone the other way. Note that the dissent
calls some of the facts differently. Generally, however, the dissent is
not making a different fact call, but is looking for a different rule of law-the failure of the breaching party to perform as promised should be
enough to recover the full cost to perform, and it shouldn’t matter if the
breach caused any injury or if the plaintiff was unreasonable. A
contract is a contract. In any case, in a jurisdiction with Jacobs &
Young as the law, it is possible to find for Lisa in this case, depending
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on what we learn about the bona fides of the contractor. Even if Willis
is in good faith, it is possible that the injury to her is sufficient to prevent
application of Jacobs & Young. Similarly, because Lisa has been
injured, there is no suggestion on the facts presented that she is
behaving strategically (yet).
5. WARREN ON PEAVYHOUSE (v. JACOBS)
a. Peevyhouse stands on different grounds. The breach is material, and
the aggrieved party suffered measurable, if small, damages, unlike
Jacobs & Young. The court nonetheless ordered a recovery based on
diminution in value rather than cost of performance. But even
Peevyhouse presents some difficulties as a basis for relieving Willis of
any liability. In Peevyhouse, the court rested on the fact that the
promise to refill the holes was merely incidental to the contract--not
what the parties contracted for. While many people question that
distinction, it does make it much more difficult to sustain damages
based on diminution in value rather than cost of performance if the
breach is located squarely in the subject matter of the contract, as it
was in Lisa v. Willis. Some of you focused on another aspect of that
difference: In Peevyhouse the injury was to a remote corner of land that
couldn’t be seen from the home, had no use, and was rarely visited.
By contrast, the missing 28 square feet of living room space is right in
the heart of Lisa’s home and something she has already indicated she
would use (she needs it for the pre-planned arrangement of her
furniture).
b. It would be possible to read Peevyhouse as an extension of Jacobs &
Young, concluding that the reservations Cardozo built into Peevyhouse
had been obliterated, so that everyone with vast disproportion in value
following breach between cost of performance and diminution in value
would be stuck with the lower calculation. That is a strong reading of
the two cases, and an outcome that sharply undercuts the basic
principle of expectancy, but it is supportable from the two cases. On
the other hand, it is possible to read each case on its own facts and
decide that each is problematic in the instant case, leaving this judge
free to decide that the injury is too significant to permit the contractor to
be released from liability.
c. One of the best papers noted the strong assumption in contract law for
full expectancy whether it took cost of performance or any other
remedy to accomplish it. The student then tied this presumption to
both Jacobs & Young and Peevyhouse to conclude that on rare facts
an aggrieved party can avoid paying, but that neither case would bind
the court in our problem. (The students noted that the Peevyhouse
court was at some pains to indicate how limited was its ruling.) The
students had a very thoughtful approach.
6.
d. Contract v. status (10/26)
i. Issues to resolve when deciding whether to resolve by contract as opposed to status
1. Relative bargaining power of parties
2. Do you want the parties to be in a bargaining relationship?
3. Are there certain things you cant bargain away?
4. Length of marriage- do we want to allocate all the risk at the beginning by
contract?
ii. Cases
1. Balfour v. Balfour- you cant have a contract in an intimate relationship
between husband and wife even if there is a written agreement
a. Love and affection cannot be a consideration; parties never intended
agreement to be sued upon
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b. We don’t want these types of disputes clogging up courts given that
courts have no expertise in love and consideration
c. Wife can still recover based on status
2. Marvin v. Marvin- a nonmarital partner can recover on an express or implied
contract if one exists or in quantum meruit if she conferred a benefit
3. Morone v. Morone- rejects Marvin and says that you cant have an implied
contract for rendition of services by people living together because these
services were probably rendered gratuitously
4. Baby M- Contract for Baby M is not legally enforceable because there are
certain things that are inalienable. We will give baby to party best able to care
for it (rich)
a. Public policy demands that children cannot be party to a contract (we
don’t car what happens to a car but we care about what happens to a
child)
b. Its not a contract issue, it’s a status issue to be decided by
family/adoption laws
5. Jones v. Padavattane. EFFICIENT BREACH
i. A pareto-optimal outcome whereby all parties are either better off or at least no worse
off
ii. Presumes an imperfect market and that damages are foreseeable
iii. Key questions
1. Who should get the benefit for an efficient breach
a. In an imperfect market, you might say breacher should get benefit
because he knows how to position himself to exploit the market
dynamic
b. But in a perfect market, if I increase or add damages for breach I’m just
transferring the benefit from the breacher to the aggrieved party without
preventing the efficient, wealth-enhancing transaction
iv. Liquidated damages clauses narrow the range of efficient breaches and you can end up
punishing involuntary breaches
v. Moral theory does not allow efficient breach
vi. Posner caught between the differing views of bargain theory and moral theory on
intentionality when he says efficient breach is good but rules out “opportunistic breach”
because in reality, all efficient breach is opportunistic
VII. REMEDIES
a. Types of suits
i. Suit on contract
1. Suit for breach of contract where court determines damages
2. Reasons we want to enforce contract
a. Bargain theory
i. We want to enforce contracts because they are wealthenhancing, so the more contracts we have, the richer we are
b. Fried
i. We want to enforce contracts because they are freedomenhancing. By allowing ourselves to be bound, we are actually
expressing our freedom
ii. Quasi-contract suit
1. Plaintiff is not asking for enforcement of contract, but rather for damages based
on value of performance
a. Examples
i. Contract is too vague to be enforceable
ii. Contract is illegal
iii. Parties have been discharged due to impossibility or frustration
of purpose
iv. Plaintiff has materially breached
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b. Equitable remedies (10/18, 10/19)
i. Types of equitable remedies
1. Specific performance is a remedy in which promisor is ordered to render the
promised performance
2. Injunction- directs a party to refrain from doing a particular act
ii. Limits on equitable remedies
1. Damages must be inadequate to protect the injured party in order for
equitable remedy to be awarded. Usually occurs if:
a. Damages can not be calculated with sufficient certainty
b. Money cannot substitute for the performance
2. Definiteness- contract terms must be definite enough to allow order to be
framed
3. Difficulty of enforcement- courts must be able to enforce and supervise the
order (e.g. opera singer cant be forced to sing well because how can court
enforce)
iii. Key types of cases
1. Land-sale contracts
a. General rule: You get specific performance because we cant put
monetary value on unique peace of land
i. Exception: Van Wagner- you cant get specific performance on
contract for real property if monetary damages are definitively
calculable
2. Personal services contracts
a. General rule: No specific performance because this would violate
13th Amendment provision against involuntary servitude.
b. But courts may grant an injunction in an employment contract
i. To obtain an injunction, employer must show
1. Unique and extraordinary nature of employee’s
services
2. Would not leave employee with no other reasonable
means of making a living
ii. Other key factors
1. Usually must have a limited scope (geography and
time) and be administrable
2. Must be specified in contract!
a. ABC v. Wolf- ABC couldn’t get negative
injunction because contract contained no
provision for it
3. Negative injunction follows same principle as allowing
restitution in Boone v. Coe
a. We cant give you what you want (specific
performance) but we wont allow you to be put
in worse shape (by allowing this person to
work somewhere else).
i. Gives leverage and bargaining power
to parties in personal services contract
because otherwise their remedies are
limited (expectancy too speculative,
reliance minimal)
3. Sale of fungible goods
a. General rule: No specific performance
i. Exception- Something about contract makes it impossible to
get elsewhere under the same terms- e.g. an output or
requirements contract where the item is not in ready supply.
1. See Laclede Gas v. Amoco Oil where specific
performance awarded in oil contract because it was a
long-term contract which couldn’t be obtained
elsewhere given volatile nature of oil prices in 1970s
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iv. General hostility and reluctance to award specific performance is due to a number
of factors
1. Concern that it will be overcompensatory
a. Parties will ask for specific performance when cost of performance is
high and then will settle for a damage award that would be higher than
what court would have awarded
2. Might be inefficient if a change in circumstances means that specific
performance would pose a much higher cost to breaching party than benefit to
aggrieved (Peavyhouse)
a. Liberty issue- we prefer minimalist intervention of making people pay
money rather than forcing them to do something
3. When Holmes said that contract law is not a promise to do the thing, instead it
is a promise to do the thing or to pay the money equivalent
v. Warren ideas
1. The rationale for the tilt against specific performance is multilayered. In the
case of personal services, there is the close association with slavery, and the
notion of personal liberty that the court will not invade even if someone has
signed a contract. There is also the problem of court supervision, and the
substantial resources to monitor a reluctantly performing defendant. There is
the question of judgment, whether the court has expertise to tell whether the
singer is doing her best or the cleaner is sweeping in the corners. Courts stay
out of these questions.
2. In contracts for the sale of goods, much of the resistance to specific
performance is based on the presumption of fungibility—that the buyer can get
the goods elsewhere and minimize the damages. The seller is then free to sell
to higher valued users, thus playing out the efficient breach theory.
3. The difficulty with the rule is that it makes service contracts largely
unenforceable. So long as that is the case, no one can rely on them, make
investments based on their continuation, etc. Moreover, this approach has
pushed parties toward contracting around non-enforceability with negative
injunctions which may be more punitive on parties who fail to perform.
4. In the case of goods, the under-enforcement means that the breaching party—
rather than the aggrieved party—gets the benefit of the goods when they are
re-deployed elsewhere. The weaknesses of the efficient breach hypothesis
show up with greatest force right here.
c. Expectation
i. By definition, put plaintiff in position hew would have been in had the contract
been performed by the defendant
1. We use this measure as opposed to status quo ante. See Hawkins v. McGee.
Hawkins put in the same position as if McGee’s guarantee of 100% as good
hand was true (he gets difference in value of 100% good hand and the hand he
got after surgery)
2.
ii. Uses: this is the typical measure of damages in contract
1. See Hawkins, Peavyhouse
iii. Formula for calculating
1. Equal to value of defendant’s promised performance (generally contract price)
minus any benefit received from not having to complete his own performance
a. Cost of completion- in case of defective performance by defendant,
plaintiff can get the cost of remedying or completing the performance.
b. Diminution of value will be awarded where the cost of completion is
clearly disproportionate to the value of the performance—avoid
economic waste
i. See Peavyhouse- When difference between cost of
performance and the value to be conferred is large, courts will
award the diminution of value as opposed to the cost of
performance
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1. Doing otherwise would be gross economic waste
2. Cost of performance would put Peavyhouse in a better
position than she would have been in if she had not
entered the contract OR if the contract had been fully
performed
a. Peavyhouse probably doesn’t want the land to
be restored, she wants the $29K
3. Idea of distinguishing between substantive and
incidental portions of the contract and that breaching
the incidental portion not as serious as breaching the
substantive part
4. Court says that contract gives Peavyhouse right to get
land 100% restored OR the monetary equivalent (but
allows the coal company to choose
c. Only losses which can be established with reasonable certainty (e.g.
not speculative) are recoverable
2. Courts will only use the objective measure of expectancy (market value)
and not the subjective standard (value to buyer)
a. Contracts can be wealth-enhancing in a number of ways, but the law
only protects the objective value, not the subjective/emotional. You are
put in the same position as performance, but only in economic terms.
(Peavyhouse, Luten Bridge, etc)
i. So damages can be under-compensatory because they don’t
include the subjective or emotional value- this is dealt with in
torts (but only where the relationship is involuntary). The price
in contracts is the same for the emotionally-involved and the
detached
b. Arguments for using objective standard
i. Subjective valuation is difficult to commensurate and runs risk
that aggrieved party will overstate what the value was
ii. Makes it possible for other party to know what the cost of
breach is knowing that you only have to pay the objective
value (which is a theoretically discoverable number) allows you
to calculate risk and consumer surplus
c. Arguments for using subjective standard
i. Protects interests of aggrieved party
ii. Freedom/moral argument- you are entitled to fulfillment of
promise
iii. Bargaining- you have to use the valuation of the party in the
contract- by entering into it, they told you what the wealthenhnacing transaction was
d. WARREN ARGUMENT
i. Contract damages are rewarded on market valuations, not on
idiosyncratic valuations. If the market values a good at $100,
that’s all the aggrieved party gets, even if she valued it far
above $100.
ii. This is an interesting twist in contract law. Remember the idea
of wealth creation from contract law? The whole notion was
that we knew from the exchange that I valued $100 more than I
valued the watch, and Doshi valued the watch more than he
valued $100. But if Doshi really, really wanted that particular
watch—it was his mother’s watch, he loved the funny catch, it
made a perfect prop, it filled out his collection—most of the
time he could get only the market valuation for the watch. That
leaves him under-compensated.
iii. The rationale may tie again to the reasons that speculative
damages can’t be collected: too hard to prove, too unhitched
from reality. Interestingly, it is easiest to see the rule and the
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reason it its exception—when a plaintiff can get specific
performance for goods. But the under-compensation point
generally applies.
iv. The bad side to the rule is similar to the point on non-monetary
damages. Individuals may be less likely to be compensated.
Commercial contracts are favored. But note here that the
benefits from goods contracts are also less likely to be
compensated.
3. Why we want to protect expectancy
a. Bargaining theory
i. Deters parties from breaching
ii. Permits people to rely on contracts and thereby to do other
things/enter into other contacts because they know this value is
coming in- WEALTH ENHANCMEENT
b. Moral theory
i. You made a promise and have a moral obligation to fulfill it
ii. Other party has relied on it and is entitled to full amount; even if
he hasn’t relied, he has been injured by the loss of the
expectancy itself
iii. DOES NOT FOCUS ON HARM- the idea here is that you did
something wrong and deserve to be punished for it- like
criminal law
1. Recision only compensates injured party for harm (too
much like torts) and restitution is too modest of a
consequence because it only forces the wrong party to
give back the benefit they’ve earned
d. Reliance (10/10, 10/12)
i. Put the plaintiff in the position he would have been in had the contract never
been made.
1. Equal to amount plaintiff has spent in performing or preparing to perform
2. Based on cost to plaintiff, not value to defendant
ii. Uses
1. Expectancy cant be accurately calculated
a. Profits too speculative
i. Dempsey, Anglia, Security Stove- when profits are too
speculative to be compensable, the aggrieved part can collect
reliance instead of expectancy
1. Apply the rule of Dempsey to avoid paying the kind of
speculative damages that would be involved with lost
profits from a new venture. Potentially apply it to
consequential damages
2. Freund- you cant get cost of production when you are
entitled to the revenues from a product and not the
product itself; revenues for unpublished books are too
speculative to be compensable
ii. Compare with Ferrell v. Elrod (cosmetology school can collect
lost profit from 9 month delay in opening because they can
show what profits were in their first 9 months)
iii. Sometimes we get reliance even when expectancy can be
calculated: Sullivan v. O’Connor (Ben Kaplan)
1. Grants reliance even when expectancy is calculable
because this is a non-commercial contract (and
therefore special like Club Med)
a. Antithetical to classicists, who do not believe
that outcomes should change based on the
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different circumstances of each case- for them
expectancy would always apply
2. Under this conception, the loss of expectancy is not
regarded as a real injury; instead we award a more
tort-like remedy to put the aggrieved party in the
position it would have been in status quo ante
iv. Reasons for not compensating speculative profits
1. We decide to undercompensate
a. Leave risk with aggrieved party because they
are in the best position to mitigate (Hadley,
UCC)
b. May pose a problem for Posner’s efficient
breach- doesn’t it require adequate
compensation to be pareto optimal?
b. Vendee in land contract
c. No contract exists but some relief is justifiable
2. Promissory estoppel
iii. Issues
1. Pre-contract or post-contract expenses: generally, cant recover expenses prior
to contract signing
a. Dempsey
i. You only get reliance expenses incurred post-contract
formation
b. Anglia and Security Stove
i. You get reliance expenses incurred both pre and post contract
formation
1. Security Stove gives pre and post because unlike
Dempsey, it was a common carrier that was required to
take on the contract and thus justified reliance preacceptance. Dempsey didn’t have to take contract so
you cant recover for reliance before acceptance.
2. Anglia and Dempsey are inconsistent
a. In Anglia, defendant could have reasonably
foreseen that once he signed on the prior
expenses would be contemplated in breach
b. Dempsey employs a torts causation analysis
in assessing whether the breach caused the
problem but Anglia looks at the entire
problem as being caused by the breach where
Dempsey inquires into the causation of specific
points
iv. Functions of reliance
1. Deterrence
2. Need something to deter breach if lost profits are speculative
3. Compensation for injury
4. Plaintiff deserves to get something
e. Restitution (10/24, 10/25)
i. Restitution is the value to the defendant of the plaintiff’s performance and is
intended to prevent unjust enrichment
1. Primary uses
a. Partial performance by a non-breaching plaintiff suing on contract
b. Breaching plaintiff who has partially but not substantially performed
suing on quasi-contract for value conferred
i. e.g. Britton v. Turner- breaching party can get value for
benefit conferred even if he doesn’t fully perform; Boone v.
Coe- plaintiff could have collected restitution
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2. Based on market value rendered to defendant and not limited by the
contract price
3. Plaintiff can get restitution even if he would have lost money if contract fulfilled
ii. Whereas Restatement Second uses a value conferred analysis of restitution
under “quasi-contract”, Restatement First took a contract-based approach of
using unpaid contract price
1. Restatement 1: unpaid contract price – cost of completion – cost of
breach
a. Grounded in contract and expectancy- puts aggrieved party in same
position as full performance
i. Advantages
1. Moored to a number
2. Protects aggrieved party by giving expectancy
ii. Has a cap- you cannot get more than benefit conferred
2. Restatement 2: value of performance – cost of completion – cost of
breach
a. Not really a contract remedy but rather value-based aspect of “quasicontract”
i. Advantages
1. Contract price only tells the minimum value a person
attaches to performance but not what they actually
value it at
2. Partial performance is not really specified by contract
price because the contract is for something differentthat’s why we cant use contract-based analysis
ii. Problem
1. When value conferred is greater than contract price,
the aggrieved party ends up paying more than they
contracted for and this means we no longer can
guarantee wealth enhancement because the aggrieved
party may end up paying more than the value the
service at. Also makes it riskier to enter contracts
a. courts may limit to contract price in this case
f.
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Plaintiff choice over remedies
i. Common law court decision restricts plaintiff’s ability to choose a remedy other
than expectancy
1. Bollenback- Example of the very limited scope of choice over remedy available
to injured party in common law
a. Court allowed aggrieved party to elect to take recision/reliance instead
of expectancy even though expectancy was calculable but narrowed
holding to very special circumstances so that plaintiffs cant just elect
whichever remedy is higher:
i. Kind of contract limitation (insurance contract here)
ii. Intentional and substantial breach (contract was breached 4
times)
b. Rationale: If we give aggrieved party choice, we effectively relieve them
of the risk of entering contract because they can just get reliance and
go back as if contract never happened
ii. UCC narrows range of options available to plaintiff but does it along a different
line than common law (Ramirez case)
1. Injured party has choice of remedy in the following cases:
a. 2-601 and 2-711- Rightful outright rejection of non-conforming goods
b. 2-608- Rightful revocation after accepting non-conforming goods which
are substantially impaired in value by defect (Durfee case)
2. Injured party limited to expectancy when:
a. 2-714- Has already accepted non-conforming goods whose nonconformity does not substantially impair value
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i. Under 2-719, if he has a contractual right to get
repair/replacement of goods, he can do so
iii. Restatement (common law) allows a much broader choice of remedies
1. Restatement 373
a. Generally, you are entitled to restitution of any benefit conferred by part
performance or reliance (injured party’s choice) except when all that
has happened is that the other party did not pay you a definite sum of
money (buyer breach)
i. Rationale behind exception is that we don’t want sellers to be
able to dispose of risk they assumed in entering contract by
just deciding they would rather go back to initial state.
g. UCC Remedies
i. When does UCC apply
1. Covers sale of goods, not real estate or services
a. Also applies to bulk sales, letters of credit, bills of leanding, certiciated
securities, secured lending
b. 49 of 50 states adopted it; Louisiana did not adopt Article II because its
law is based on Napoleonic code not the English system
c. Based on the “real world”- Llewelyn called up real business people to
learn how things are done
2. Mixed contracts (services and goods)
a. Under Bonebrake test, UCC would apply when the predominant part of
contract is for goods with services only incidentally involved; whereas
common law would apply when predominant part of contract is for
services with goods incidentally involved
i. NOT A MAJOR ISSUE BECAUSE UCC AND COMMON LAW
ARE SO CONVERGENT
ii. Lawyers would just argue both sides- UCC and common law
1. Although this issue is not often litigated because the
UCC and common law are generally convergent, it
may be important here.
ii. Buyer remedies (9/28, 10/3)
1. 2-712- Contract/cover differential
2. 2-713- Contract/market differential
a. 2-713: deals with market price AT TIME OF BREACH as opposed to
time of tender like 2-708(1)
i. Need to prevent buyers from “playing the market” by waiting to
cover in a falling market. We give buyers two choices:
1. 1) Cover and assume no risk
2. 2) Take contract/market differential and then go out
and “play the game”
b. No buyer equivalent of “lost volume seller”
c. WARREN: UCC makes clear that when a seller breaches, the buyer’s
damages are typically measured at the time the buyer learns of the
breach. See UCC 2-713(1)
3. Cases
a. Durawood
i. An aggrieved party can cover internally and still collect
damages under 2-712(2) for difference between contract price
and cost of cover
ii. BUT you can only be compensated for the commercially
reasonable choice; so you cannot recover lost profits from
having to cover internally instead of buying in the market
unless it was commercially reasonable to do so
iii. you cant get both contract/cover differential and lost profit- this
would overcompensate you
b. Interior Elevator v. Limmeroth
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c.
i. Buyer who partially covers and then asks for contract-market
differential (2-713) for entire amount cannot collect damages
under 2-712(2) for cover-contract differential. Instead, the get
2-713 for the entire amount.
1. You are better off covering completely or not covering
at all in order to keep yourself squarely between one of
the 2 UCC provisions
Overstreet v. Norden Labs
i. In order to recover on an express warranty, you must show that
it was part of the basis of the bargain- that you relied on it in
entering the bargain.
ii. Conflicting views on the alternative product rule- if a warranty
for a produce which may have prevented but did not cause a
harm is breached, the aggrieved party must show that
alternative means of prevention were available in order to
collect damages for the cost of the harm as opposed to just the
cost of the product whose warranty was breached.
1. Dissent opinion (Judge Keith) rejects alternative
product rule that you don’t have to show there was an
alternative product because this would be absurd if
you had unique consumers or products. Expectancy
itself is enough here.
a. Supported by Hawkins- we didn’t care that
there was no alternative surgeon who could
have performed surgery. Showing reliance was
not necessary- just that the promise created an
expectancy.
b. Also UCC rejects (see Warren 1999 exam
answer)
2. Majority judges argue that you need to show that harm
was caused by the breach and this requires fulfilling
alternative product rule. Reliance is important here.
iii. Seller remedies
1. UCC 2-703
a. Index of remedies available to seller
i. Withholding delivery of goods
ii. Stop delivery by bailee (third party delivery)
iii. Goods unidentified to contract (unfinished goods in
manufacturing process)
iv. Resell and recover damages
v. Recover damages for non-acceptance
vi. Cancel- walk away from contract without being guilty of breach
2. UCC 2-704(2)
a. On unfinished goods, seller can finish goods if it is commercially
reasonable based on information available at time of breach
i. Underlying policy: we will maximize wealth if we act in a
commercially reasonable way over the long-term
1. Consistent with Luten because it was not commercially
reasonable to go forward there because finishing
something completely useless is wasteful
2. However, sometimes, not completing unfinished good
wastes what you have already put into it
ii. You can still finish even if less than 50% of people think it is
commercially reasonable. Aggrieved party has responsibility of
making his best prediction of what will happen
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1. We protect seller from the possibility of an
unsuccessful lawsuit- we don’t want him to have to rely
on the lawsuit
3. Contract/resale differential (2-706)
a. 2-706: contract price – resale price
b. UCC 2-706(1)
i. Seller can resell goods- if it is commercially reasonable
1. Damages would be difference between contract
price and resale price plus incidentals minus
expenses saved
4. Contract/market differential [2-708(1)]
a. 2-708(1): unpaid contract price – market price (at time and place of
tender)
i. Eliminates waste by not forcing seller to complete goods
and resell- he can choose not to finish goods if it doesn’t make
sense
ii. Protects your assumptions about market risk when entering
transaction because you can still get difference between
contract price and the market price at the time of tender (time
you’re supposed to perform)
iii. Different than 2-706 and 2-708(2) because no actual sale
involved- uses theoretical construct of market price
1. 2-706 and 2-708(2) are premised on a resale- giving
profit from sale
5. Lost profit [2-708(2)]
a. 2-708(2): If measure of damages in 2-708(1) is inadequate to put the
seller in position as good as if there was full performance, then
damages should be expected profit in full performance + cost
incurred – resale price
b. Contract price – expected costs (at time of formation)
i. Applies only under certain conditions (lost volume seller)
1. RE Davis: Seller should get lost profit under 2-708(2)
IF
a. 1) Shows he can sell two units simultaneously
(i.e. resold good would have been sold anyway
regardless of breach)
i. Generally requires a BUYERCONSTRAINED market where supply
of buyers is shorter than seller supply
of goods
b. 2) Show that it would be profitable to sell both
the breached unit and the resold unit
ii. Provision for “due credit for proceeds of resale” applies only to
resale of scrap- you only deduct from lost profit for resale of
scrap
iii. Nobs Chemical v. Kopper
1. Can a lost volume seller collect contract/market
differential under 2-708(1) instead of lost profit under 2708(2)?
a. Here, NO- it would over compensate seller.
Seller here is a “jobber” who never acquired
the contract goods and was therefore in no
position to sell them (e.g. get contract/market).
iv. Olds v. Mapes-Reeves1. If an aggrieved party is able to perform multiple
contracts simultaneously, then the court will not deduct
from his damages any profit from other contracts
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performed during the period when a breached contract
would have been performed
a. ex. Professor Warren would get profit from two
book contracts if one was breached because
she could perform both contracts
simultaneously. However, she would not get
profit from both contracts if one was for
teaching at Harvard and the other at Stanford,
because she couldn’t do both.
2. Whether the contract opportunity itself would have
existed without the breach is irrelevant- all that matters
is that the party could have performed both
simultaneously
h. Consequential damages (10/3, 10/4, 10/5)
i. Types of damages under expectancy
1. Direct
a. e.g. Payment I should have received, contract-market differential, cost
of cover
2. Consequential
a. Injuries in addition to direct damages which were caused by breach
and were not what was contracted for
3. Incidental
a. Costs which pop up as an incidence of trying to cover
ii. Hadley
1. Consequential damages are limited to those which are naturally arising
(could reasonably be foreseen) from a contract OR were specially
communicated such that they would be included in the scope of what would
reasonably be expected to arise
2. Underlying reasoning
a. Price-setting issue
i. You cant price for something you can’t foresee
b. Asymmetry of information
i. Where as information about risk in direct damages is equally
available to both parties, information about consequential
damages is asymmetrical
c. Incentivizes least cost avoider to communicate risks
i. For the sake of efficiency, the person who can avoid harm at
the least cost should be responsible for it
1. Person with best access to information (has lowest info
costs) about what consequential damages will be is in
best position to avoid them, so they bear risk
2. After risk communication, other party has the option to
continue to contract with the risk priced in, or to refuse
to go forward
d. Incentivize contract formation
i. Making carriers liable for consequential damages would result
in higher prices for everyone to pay for the insurance
ii. Hadley allows two-tier pricing: By making the least cost avoider
responsible for risk, they have the incentive to minimize it by
specially communicating and paying the higher price. Parties
which don have the special circumstances wont have to pay a
higher price to insure the other parties who do.
e. Administration/court system costs- how do you review jury verdicts
otherwise
f. Take power out of hands of a jury that in the post-industrial
Hadley world is likely to be comprised of consumers
g. Contract is between agents of the parties and not parties
themselves
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h. Efficient breach- in a world without Hadley, cost of breach would be
increased to the point where some otherwise efficient breaches would
not occur
i. Different than torts because there we want strict liability for personal
injury to incentivize manufacturers to make safer products; but in
contracts, we don’t want strict liability because this would actually
discourage contract formation
j. Carriers and public policy
i. Common carriers are a public service and if we make them
liable for CD, it will hrt rest of economy
ii. Disproportionate nature of carrier fees vs. potential CD
iii. Lack of information on risk
iv. Standard nature of carrier fees- cant just change on spot
v. Carriers would face repeat litigation
iii. UCC on consequential damages
1. 2-715- Allows consequential damages only if
a. SELLER HAD REASON TO KNOW and
i. Like special communication requirement in Hadley
b. COULD NOT HAVE BEEN REASONABLY PREVENTED BY COVER
i. Aggrieved party has burden of trying to mitigate if they want to
collect consequential damages
2. Restates Hadley rule and them creates incentive on the aggrieved party sideso it actually makes things even harder for party wanting to collect
consequential damages- shrinks protection even more
3. Hadley rule on consequential damages will be the default rule but if the contract
specifies otherwise we will generally accept what it says
a. 2-719- allows you to limit remedies provided that there is a minimum
adequate remedy (2-719(2))
b. Kearney- contract terms excluding consequential damages will
generally be upheld although not always
i. In certain cases you might be able to get consequential
damages even if they were excluded by contract
1. e.g. seller’s wrongful repudiation of a repair warranty
imposing consequential damages on buyer
2. Goes against Hadley but consistent with UCC
requirement of minimum adequate remedy
iv. Tacit acceptance
1. Morrow v. First National Bank of Hot Springs: Arkansas court rules that an
aggrieved party must show that breaching party tacitly accepted specially
communicated circumstances in order to recover consequential damages
a. Rationale: Without tacit agreement test, consequential damages can
get out of control- need to limit the pin-in risk not limiting remedies,
but actually limiting the formation of contracts on certain terms (e.g.
Hawkins where Hawkins pain and suffering not part of contract)
b. Concern that even if you know the risk, you still cant readjust prices
because your dealing with an agent of a huge, hierarchical company
who doesn’t necessarily have authority to change standardized prices
2. UCC rejects tacit agreement test
a. Rationale: Our duty to mitigate already caps consequential damages.
Adding the tacit agreement test brings you to the madness of giving
court power to inquire into each independent clause of a contract and
test whether there was tacit agreement.
i.
i.
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Punitive damages (10/5, 10/10)
i. Punitive damages are rarely awarded in breach of contract except in certain rare cases
1. If a breach is a tort, punitive damages are recoverable
a. Bad faith conduct can be a tort in some cases
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i. Seaman’s- bad faith breach creates a tort and aggrieved party
can get pain and suffering VS.
ii. Foley- breach does not create a tort because this would result
in overdeterrence and is really a question that the legislature
not the court should take on if they want to change
iii. Patton- Posner decision- it doesn’t matter if a breach is
deliberate because we don’t want to deter efficient breaches
2. Insurance and other special relationships
a. Ainsworth
i. A plaintiff in an insurance contract can collect punitive
damages (pain and suffering) when an insurer acts obstinately
and unjustifiably in their breach.
1. Insurance contracts as different- unlike Hawkins who
actually contracted for the pain and suffering,
Ainsworth contracted for the insurance company to
take on the pain/stress of worrying about paying his
medical bills
2. Insurance company’s breach occasions the pain and
suffering whereas Hawkins would still have pain
without breach
ii. Although typically, courts do not intervene when there is
unequal bargaining power, the Ainsworth court does
1. Argument for not intervening:
a. Fear of overdeterrence- don’t want unequal
relationship to prevent presumably wealthenhancing transaction
b. Fear of underdeterrence- if you intervene,
people might enter into contracts even when
they shouldnt because they know then can get
out
c. Protect freedom to enter into contracts (Fried
argument)
d. Presumably wealth-enhancing transactions
2. Reasons why Ainsworth court intervenes
a. Insurance relationship as special public utility
issue
i. Already a regulated industry (fixed
prices mean no negotiation so how do
you know it is wealth-enhancing)
ii. If insurance company wont pay,
consumer capacity to cover is very
limited
iii. Complexity of insurance contract
means that we construct them against
the drafter in the case of ambiguity
iv. If expectancy is the only remedy,
insurance companies will just reject all
of the claims and then only pay the
ones that people actually go to court to
fight since damages will be low
b. Special relationships (where type of contract matters in determining
damages). In general, we wont give you consequential damages or
pain and suffering; but there are some contracts where the court will
step in.
i. Ainsworth- insurance
ii. Haynes v. Dodd- kind of contract matters
iii. Lamm v. Shingleton- mental anguish damages appropriate in
burial services contract
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c.
j.
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iv. Club Med- punitive damages appropriate when you contract
for relaxing vacation but get a vacation from hell
1. Here, Hadley “forseeability” language is actually used
to expand rather than limit damages because vacation
company reasonably could have forseen the
injury/impact of their breach. Same thing with funeral
service company in Lamm.
Intentionality of breach- cases dealing with quality of breach (good
faith/bad faith; deliberate)
Limits on remedies
i. Mitigation
1. MITIGATION PRINCIPLE- When we grant expectancy to aggrieved party, we
must do it at the lowest possible cost to the breacher (9/19)
2. Mitigation is required when (9/21):
a. 1) There is a job with equal conditions available AND
b. 2) The party does not have excess capacity to perform additional
contracts simultaneously
i. So scope of mitigation obligation is based largely on facts and
circumstances
1. Shirley McClane- very limited obligation because no
work of equally condition would have been available
2. Hussey v. Holloway- more likely to have an obligation
than Shirley, but still no obligation because there was
no work of equal condition available
3. Clark v. Marsiglia- work of equal condition WAS
available because he was just cleaning paintings, so
question becomes whether he could have completed
work simultaneously
3. But Hussey v. Holloway: Given a contract requiring you to do X, the court will
not import through mitigation a new agreement for “X minus”
a. Hussey not obligated to take a lower job or work in another town
because this would change the terms of the contract itself
b. Court can inquire into status and not force Hussey to take a lower
job because this is a personal services contract
i. Personal services contracts are distinct in that they deal with
the fundamental right to control one’s body and run the risk of
creating indentured servitude if you force someone to do
something they don’t want to do
c. Hussey can collect only for loss of wages, not for subjective
damages such as loss of dignity
i. Reflects concern for overcompensating or undercompensating.
Don’t want to undercompensate Hussey by forcing her to take
a job she doesn’t want. Also don’t want to overcompensate her
by giving her $ damages for subjective considerations like loss
of dignity. Need to balance it.
4. Underlying reasoning here is the no-waste principle- we don’t want goods to sit
around and go to waste- we want to put them to their highest and best use
a. Normative theory underlying Peavyhouse and Luten Bridge- we don’t
want to overcompensate
b. Luten Bridge: Don’t continue to perform after repudiation because you
might be liable
i. Doesn’t make business sense to keep spending money and
rely on lawsuit
ii. Opportunity cost issue- you are wasting time you could be
spending on a profitable contract
iii. Risk exposure- by continuing to perform, you expose
yourselves to risks without reward
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iv. Point of indifference- you are not any better off if you complete
performance than and collect damages than if you stop now
5. WARREN ARGUMENT
a. The rationale for the rule is to prevent waste. In order to prevent
aggrieved parties from running up damages and wasting more
resources, the court imposes an obligation to mitigate—not to make
things worse. The rationale for imposing the risk of guessing wrong on
the mitigation obligation is that there is no other apparent way to make
the rule work.
b. The downside of the rule is that it falls the hardest on those who have
little access to legal services and who therefore don’t know the rule. It
also falls hard on hourly workers and those who have few resources;
they are most likely to have the rule imposed after the fact on them.
Some of you made some interesting proposals for softening the effects
of the risk of mis-guessing on mitigation.
ii. Forseeability
1. Breaching party does not bear all of the risk/cost of unforeseeable
circumstances
a. Court curbs the damages a party must pay if they default on a contractthis prevents grossly disproportionate damages in case things fall apart
i. This encourages people to enter into contracts because if you
are worried about paying grossly disproportionate damages,
you are less likely to enter.
ii. e.g. Peavyhouse- Garland does not have to pay the $29K for
restoring the land
iii. Damages after repudiation
1. Appropriate measure of damages when the breaching party repudiates
before performance is complete is EXPECTED PROFIT FROM FULL
PERFORMANCE + COST INCURRED TO DATE OF REPUDIATION
(excludes cost of performance after date of repudiation)
a. see Clark v. Marsiglia hypothetical. There are two ways to award
damages in this situation
i. 1) Since the repudiation occurred after contract was 20%
complete, he should get 20% of wages and 20% of cost
incurred
ii. 2) Should get full expected profit plus the cost incurred up to
the date of repudiation
2. UCC 2-611: seller can retract anticipatory repudiation unless other part
cancelled or materially changed his position or otherwise indicated that he
consider repudiation final
iv. Liquidated damage clause is a provision in contract specifying the consequence of
breach
1. General rule: courts will enforce a liquidated damage provisions only if it is not
a penalty, meaning the clause attempts to estimate actual damages rather
than penalize a breaching party by awarding damages far greater than those
actually suffered
a. C&H Sugar v. Sunship- a per day liquidated damages clause is
enforceable even though actual damages would have occurred without
the breach because the LD clause is reasonable and it would have
been difficult to ascertain what the loss due to breach was
i. Requirements a liquidated damage clause needs to meet
to be enforceable
1. Reasonable forecast-amount fixed must always be
reasonable relative to the anticipated or actual loss
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from breach. Note: UCC rule—Kemble rule (class) is
just that you lonely look at anticipated harm
a. Crunchtime: Modern view is that clause is
enforceable if it was reasonable either at time
of contracting or in light of the actual
damages that have occurred
i. So unreasonable forecast in clause
may still be enforceable if the actual
damages are very high unexpectedly
ii. Kemble v. Farren view (Posner) is
that you only look at anticipated harm
in determining reasonability of LD—
actual harm at time of contracting does
not matter
ii. Difficult to calculate
1. Some courts require harm from breach to be uncertain
or difficult to calculate, even after the fact Kemble v.
Farren
2. When there is no loss at all, courts are split on
whether to apply LD clause but Restatement does not
enforce it
3. Blunderblus clauses which stipulate same amount of
LD for any breach regardless if trivial or important will
not be enforced if breach is just trivial
a. In case of major breach, courts are split but
modern view is to enforce blunderblus clause
i. NOT IN: Kemble v. Farren- court
strikes down a LD clause which would
have applied to a slight breach even
though the actual breach was not
slight- reflects court hostility toward LD
v. UCC 2-718
1. LD clause will be enforced if the sum is
a. Reasonable either at time contract was made or viewed in light of
actual damages
b. Difficulty in proving loss
c. No other adequate remedy is available
i. UCC similar to Kemble in that it requires actual damages to be
difficult to ascertain in order to preserve the compensatory
function of contract as remedy, but different in that it allows
comparison to either actual harm OR anticipated harm
vi. Courts are split on whether a party can elect a different remedy when the contract
contains a liquidated damage clause which is legally enforceable
1. Mahoney: You are limited to a choice of remedies given to you in the liquidated
damages clause- you cant import another remedy
2. Lefemine: You cant enforce a LD clause in a contract which gives the seller a
choice bet LD and actual damage because the LD here is a penalty. It’s a
penalty because seller will only pick it when it is greater than the actual
damages, meaning that it is by definition penalizing.
vii. Courts have been generally hostile towards liquidated damage clauses
1. LD clause undermines the notion of contract as expectancy (remedy) and
courts are very reluctant to give the power of determining remedies away
a. If we allow parties to determine the remedy, then we could no longer
ensure wealth-enhancement
b. LD discourages efficient breach by adding to the costs of breaches
which would otherwise be efficient (Posner)
c. Potential that LD overcompensates
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2. Argument for LD is that as long as you have two informed, rational actors who
negotiate the clause, then it should be wealth-enhancing because they
otherwise would enter it. (Posner). Even Fried would agree based on
preserving freedom to enter into contract
3. Posner: likes LD because of freedom of contract/autonomy/wealthenhancement but dislikes because he doesn’t want to take power out of court
hands and he doesn’t want to deter efficient breech
viii. WARREN ARGUMENT
1. Some of you mentioned the refusal to enforce liquidated damages clauses as
an indication of under-compensation. This is a tough analysis to sustain.
Liquidated damages clauses substitute for expectancy and may be either overor under-compensatory. It isn’t clear to me how full enforcement of such
clauses would increase the likelihood that people would receive expectancy. It
is possible, of course, to create a tautology that treats liquidated damages as
the expectancy, but that misses the heart of the question. In effect, if you can
pull this tautology here, you can do it everywhere—e.g., expectancy is what you
would gained less your attorney’s fees to collect it. The real point was to put
parties in the position they would have been with full performance, and that’s
not where liquidated damages are aiming.
VIII. ATTORNEY FEES
a. The American Rule requires parties to pay their own attorneys’ fees. This means that even a
plaintiff who recovers 100% of her losses, will nonetheless end up behind after she pays her
attorney and other litigation costs. Other countries use different rules that impose fee-shifting in
contract cases, and it is used in the U.S. in some specific areas of law or by contract.
b. The justification for such a rule is usually turns on access to the courts. If people were afraid
that a suit against a large company could put them at risk for millions in attorneys’ fees, then
they might be reluctant to sue, especially for modest amounts. This would create underenforcement of contracts. It would also produce a wealth bias in access to the court systems.
c. A twist on this idea applies even when both parties have substantial resources. If someone
risked paying both his own and his opponents’ attorneys’ fees, would that person withdraw from
litigation? Perhaps it would quickly become to risky to go forward, applying a cost-benefit
analysis that would force settlements early in the game for the risk-averse.
d. A third justification turns on waste—would people supervise their lawyers’ fees less carefully if
they were confident that someone else was going to pay? The pay-your-own-lawyer rule keeps
everyone supervising.
e. The downside to the current rule is often under-compensation as well. People cannot afford
lawyers to sue for small amounts, so they don’t enforce those contracts even when they have
legal rights. Of course, that can cut the other way—it conserves judicial resources to keep
small cases out of the courts.
f. There are a number of twists and turns on these themes, and some people suggested some
novel changes in the rule.
outlines.ilrg.com
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